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Preface

Upon the establishment of the Foundation for Economic Education (FEE) in 1946, Ludwig von Mises became a part-time adviser, and he served in that capacity until his death in 1973. Whenever FEE held a seminar in Irvington, if he was in town he would drive out from New York City, where he lived with his wife, Margit, to speak to the participants. His topic was quite often inflation. I attended all those lectures, took them down in shorthand and later transcribed them. The thought occurred to me that eight to ten of his lectures on inflation, delivered in the 1960s, might be integrated, with the duplications deleted, and turned into a single piece. Hence this paper.

Mises did not like to have his oral remarks quoted or published because, obviously, they did not represent the care and precision he devoted to his writings. However, it does not seem to me that these lectures as I have edited them misrepresent his ideas in any way. Moreover, they reveal his unpretentious manner and the informal simple style he used when talking to students. He often rephrased an idea in several different ways, repeating it for emphasis. He was frequently accused of being "simplistic," of making economic subjects appear too clear and simple, but it was this very approach that made it possible for persons, even those without any background in economics, to understand and appreciate what he was saying. BETTINA BIEN GREAVES, March 2001

Human Cooperation

Human cooperation is different from the activities that took place under prehuman conditions in the animal kingdom and among isolated persons or groups during the primitive ages. The specific human faculty that distinguishes man from animal is cooperation. Men cooperate. That means that, in their activities, they anticipate that activities on the part of other people will accomplish certain things in order to bring about the results they are aiming at with their own work. The market is that state of affairs under which I am giving something to you in order to receive something from you. I don't know how many of you have some inkling, or idea, of the Latin language, but in a Latin pronouncement 2,000 years ago already, there was the best description of the market — do ut des — I give in order that you should give. I contribute something in order that you should contribute something else. Out of this there developed human society, the market, peaceful cooperation of individuals. Social cooperation means the division of labor.

The various members, the various individuals, in a society do not live their own lives without any reference or connection with other individuals. Thanks to the division of labor, we are connected with others by working for them and by receiving and consuming what others have produced for us. As a result, we have an exchange economy which consists in the cooperation of many individuals. Everybody produces, not only for himself alone, but for other people in the expectation that these other people will produce for him. This system requires acts of exchange. The peaceful cooperation, the peaceful achievements of men are effected on the market. Cooperation necessarily means that people are exchanging services and the products of services, goods. These exchanges bring about the market. The market is precisely the freedom of people to produce, to consume, to determine what has to be produced, in whatever quantity, in whatever quality, and to whomever these products are to go. Such a free system without a market is impossible; such a free system is the market.

We have the idea that the institutions of men are either (1) the market, exchange between individuals, or (2) the government, an institution which, in the minds of the many people, is something superior to the market and could exist in the absence of the market. The truth is that the government — that is the recourse to violence, necessarily the recourse to violence — cannot produce anything. Everything that is produced is produced by the activities of individuals and is used on the market in order to receive something in exchange for it. It is important to remember that everything that is done, everything that man has done, everything that society does, is the result of such voluntary cooperation and agreements. Social cooperation among men — and this means the market — is what brings about civilization and it is what has brought about all the improvements in human conditions we are enjoying today. The Medium of Exchange — Money The definition of money is very simple. Money is the general medium of exchange used on the market. Money, the medium of exchange, is something that individuals choose in order to facilitate the exchange of commodities. Money is a market phenomenon. What does that mean? It means that money developed on the market, and that its development and its functioning have nothing to do with the government, the state, or with the violence exercised by governments.

The market developed what is called indirect exchange. The man who couldn't get what he wanted on the market through direct exchange, through barter, took something else, something that was considered more easily negotiable, something which he expected to trade later for what he really wanted. The market, the people on the market, the people in organizing the division of labor and bringing about the system in which one man produces shoes and another produces coats, brought about the system in which coats can be exchanged against shoes, but only practically on account of the difference of the importance and the value, by the intermediary of money. Thus the market system made it possible for people who could not get today what they needed, what they wanted to buy on the market, to take, in return for what they brought to trade, a medium of exchange — that means something that was more easily used on the market than what they brought to the market to exchange. With a medium of exchange, the originators of the exchange can attain satisfaction finally by acquiring those things which they themselves want to consume. Money is a medium of exchange because people use it as such. People don't eat the money; they ask for the money because they want to use it to give it away in a new contract. And this barter or trade is technically possible only if there is a medium of exchange, a money, against which he can exchange what he has for the things he wants and needs. All the mutual givings and receivings that take place on the market, all these mutual exchanges that lead to the development of money, are the voluntary achievements of individual people. Through a long evolution, governments, or certain groups of governments, have promoted the idea that money is not simply a market phenomenon, but that it is whatever the government calls money. But money is not what the government says. The idea of money is that it is a medium of exchange; somebody who sells something and is not in a position to exchange again immediately for the thing he wants to consume gets something else which he can exchange for this at a later date. This "something else" is a medium of exchange, because the man who sells, let us say, chickens or eggs, does not, or cannot get directly what he wants himself to consume, but must take something else which he uses at a later date in order to get what he needs.

If people say that money is not the most important thing in the world, they may be perfectly right from the point of view of the ideas that are responsible for the conduct of human affairs. But if they say that money is not important, they do not understand what money does. Money, the medium of exchange, makes it possible for everybody to attain what he wants by exchanging again and again. He may not acquire directly the things he wants to consume. But money makes it easier for the individual to satisfy his needs through other exchanges. In other words, people first exchange what they have produced, for a medium of exchange, something which is more easily exchangeable than what they have produced; then through later exchanges, they are able to acquire the things they want to consume. And this is the service which money renders to the economic system; it makes it easier for people to acquire the things they want and need.

The Role of the Courts and Judges Government interference with the market and with money occurs only in cases in which individuals are not prepared to do what they voluntarily promised to do. Having chosen for himself the field in which he wants to work, he must barter or trade what he himself has produced in order to survive, in order to obtain the things he needs to live. If the acts of exchange are such that not everybody gives and receives the goods and services contracted for at the same time, difficulties can arise. The value and the meaning of the things which are given away and those which are received are never equal or identical, not only in size and quality but also, what is still more important, as to the time period over which an exchange is to be carried out.

If people enter into a contract, if both parties decide that something must be done immediately, there is as a rule no reason for any disagreement between the parties. Both parties to the exchange receive immediately the thing they want to acquire for what they give away. The whole act of exchange is then finished; there are no further consequences. But most exchanges are not of this kind. In reality there are many exchanges wherein both parties do not have to deliver immediately what they are obligated to deliver. If the parties to a contract, to an exchange, want to postpone the settlement, the execution, of their contract, differences of opinion can arise, some very serious differences of opinion, concerning the correctness of one or the other party's contribution. Translated from the more abstract language used by lawyers and economists, that means that if one man has entered into a contract with another man wherein he has promised to do something at a later date, the question may arise when that time comes whether this promise was really executed correctly according to the tenets of the contract.

Money is a medium of exchange, a phenomenon that developed out of the market. Money is the result of an historical evolution that, in the course of many hundreds and thousands of years brought about the use of exchange through the intermediary of a medium of exchange. Money is the generally accepted and generally used medium of exchange; it is not something created by the government; it is something created by the people buying and selling on the market. But if people don't comply with their voluntarily accepted agreements, then the government has to interfere. And in any interference of the government, the government has to find out before it interferes whether there really was a violation of voluntarily entered contracts. Such contracts are the results of agreements, and if the people do not comply with what they have promised then it is the state that has to interfere in order to prevent individuals from resorting to violence. The government is called on to protect the market against people who don't want to comply with the obligations which they have to fulfill under the market, and among these obligations is the obligation of making payments in definite sums of money. If somebody wants to appeal for government interference against other people because these other people failed to comply with what they had accepted voluntarily as an agreement, then it is the duty of the government, of the courts, of the judges, to determine what money is and what it is not. Now what governments did, what governments had done for thousands of years, we could say, is to misuse the position this gives them in order to declare as money what is not money, or what has a lower purchasing power per individual piece.

The market, the real social institution, the fundamental social institution, has one terrific weakness. The weakness is not in the institution of the market but in the human beings who are operating on the market. There are people who do not want to comply with the fundamental principle of the market — voluntary agreement and action according to voluntary agreement. There are people who resort to violence. And there are people who do not comply with the obligations which they have voluntarily accepted in agreement with other people. The market, the fundamental human social institution cannot exist if there is not an institution that protects it against those people who either resort to violence or who are not prepared to comply with the obligations which they have voluntarily accepted. This institution is the state, the police power of the state, the power to resort to violence in order to prevent other people, ordinary men, from resorting to violence.

Now, violence is a bad thing. The fact that violence is necessary, that it is indispensable in some situations, such as in settling disputes concerning contracts, does not make the institution imposing the violence, the government, a good institution. Nevertheless, the idea prevails, more or less throughout the whole world that, on the one hand, government, the institution that resorts to violence, is a great and a good thing, and that, on the other hand, the market, the system of voluntary social cooperation, though perhaps necessary — although most people don't even realize this — is certainly not something which must be considered good.

Now everything that human action has achieved is the outcome of the voluntary cooperation of men. What the government does, or what the government ought to do, is to protect these activities from people who do not comply with the rules that are necessary for the preservation of human society and all that it produces. As a matter of fact, the government's main function, or let us say even its only function, is to preserve the system of voluntary action or cooperation among people by preventing people from resorting to violence. What the government has to do with respect to this medium of exchange is only to prevent people from refusing to comply with the commitments they have made. This is not a function of building something; it is a function of protecting those who are building. Among the things refractory individuals sometimes do is to fail to fulfill their obligations under market agreements. To say it very simply, an individual made an agreement, and yet this individual does not comply with his obligations under that agreement. Then it is necessary to resort to government action. What can you do if the other party to an agreement says, "Yes, I know. I received something from you under an agreement by which I was bound to give you something in exchange. But I shan't give it to you. I am a bad man. What can you do about it? You must just grin and bear it." Or it is possible that the person who has to deliver at a later time says, "I'm sorry but I cannot, or I will not, deliver." This makes the whole market system of exchanges, the whole system based upon the voluntary actions of individuals, break down.

If a man has offered in a contract to deliver potatoes in three months, for instance, the question may come up when he delivers whether what he gives the buyer really is potatoes in the meaning of the contract. The party who was bound to deliver potatoes may have delivered something that the second party does not consider potatoes. Then the second party says, "When we made an agreement concerning potatoes we had something else in mind. We had something in mind that had certain qualities which these potatoes don't have." Then it is the duty of the government, of the judge whom the government appoints for this purpose, to find out whether or not these questionable potatoes are really what was understood by the contracting parties to be "potatoes." They must not be spoiled; they must be of a certain character; they must be potatoes according to commercial usage; and so on. They may be potatoes from the point of view of a professor of botany but not potatoes from the point of view of the businessman. This is something which trade usage determines everywhere. The judge cannot be familiar with everything that is going on in the world and, therefore, he very often needs the advice of an expert. The expert must say whether or not the potatoes in question should really be considered the kind of potatoes meant in the agreement. And then it is the business of the judge to consider the expert's advice and to determine whether what has been delivered really is potatoes or whether they are something else.

Agreements concerning products such as potatoes — or anything else for that matter, wheat, for instance — which are made regularly on the market through the intermediary of a medium of exchange, popularly called "money," can be violated, as we have seen, on the commodity side. But they can also be violated on the side of the money. That means that a conflict, a difference of opinion, may arise between the two parties to a contract concerning the money which has to be paid to comply with the contract. And then the government, the judges, must determine whether what is offered under the name of money in this case is really what the people had in mind when they made the contract. Government was not directly involved in the development of money; the task of the government in this connection is simply to see that people fulfill the terms of their contracts with respect to the money. Just as the judge can say what is, or what is not, meant in the contract by the term "potatoes" or "wheat," so under special conditions, to preserve peaceful conditions in the country, the judge must determine what was meant when the parties to a contract mentioned "money." What did the people use as a medium of exchange? What did they have in mind in their contract when they said, "I will pay you certain units of 'money' when you do what you have promised." Whether these units are called dollars, or thalers, or marks, or pounds doesn't matter; the government has only to find out what the meaning of the contract was.

This is what government has to decide. The government does not have the power to call something "money" which the parties didn't have in mind as money when concluding their contract any more than it has the power to call non-potatoes "potatoes," or to call a piece of iron, let us say, "copper." It is not that the government says what money is originally; it is just that it must say what is meant by "money" in the case of the contract that is in conflict. I have to say all these things in order to point out something people do not seem to know today, namely that money is not created by government. People today don't know this because the étatist, statist, ideas about the market and about money have destroyed knowledge of how money is created.

It is only in dealing with the problem of whether or not the money obligations in contracts have been filled that the government or, let us say, the judge, has anything to say about money. It is only in this way that the government comes into touch, originally into touch, with money — just as it comes into touch with everything else, that is with potatoes, wheat, apples, motor cars, and so on. Therefore, it is not true that money is something derived from the government, that the government is sovereign with regard to money, and that it can say what money is. It is not true that the government's relationship to money is different from what it is to other things. Money is a product of market agreements just as is everything else that enters into exchange agreements.

If a judge were to say that whatever the government calls a horse is whatever the government calls a horse, and that the government has the right to call a chicken a horse, everybody would consider him either corrupt or insane. Yet in the course of a very long evolution, the government has converted the situation that the government must settle disputes concerning the meaning of "money" as referred to in contracts, into another situation. Over centuries many governments and many theories of law have brought about the doctrine that money, one side of most exchange agreements, is whatever the government calls money. The governments are pretending to have the right to do what this doctrine tells them, that is to declare anything, even a piece of paper, "money." And this is the root of the monetary problem.

This makes it possible to do anything with money, to falsify it, or to debase it, in any way you want so long as you have the government, its judges and its executioners on your side. And therefore a system developed which is very well known to everybody. The government presumes that it is the government's right, duty and privilege to declare what money is and to manufacture this money. This system brings about a situation in which it is possible for the government to do anything it wants, anything that can be done with money. And this creates a situation in which the government uses its power to print and to coin money for such purposes as increasing the means, the purchasing power, with which it appears on the market.

Gold as Money Now, we must realize that historically people everywhere used at the beginning a definite type of commodity as a medium of exchange. Sometimes you find mentioned in books what kinds of goods and commodities were used in different countries at different ages as a general medium of exchange, as money. People once chose various kinds of commodities as media of exchange, as intermediaries between sellers and buyers. These commodities which they chose were commodities which were available in limited quantities only. If something is available in sufficient quantity to meet all possible kinds of demand, or can be increased in quantity in such a way as to meet all possible kinds of demand, then it doesn't have any value in exchange. Only something that is available in a limited quantity can have exchange value, can be considered as valuable by people.

Over centuries traders eliminated everything else from among the various articles and commodities used as media of exchange until only the precious metals — gold and silver — remained. All other commodities were eliminated as media of exchange. When I say that the other things were eliminated from being used as money, what I mean is that people in making agreements eliminated them; people in making agreements rejected other things as media of exchange and turned to using only gold and silver; they specified gold and silver in the contracts they made when trading with other parties. Thus we must realize that the evolution to gold and silver money was brought about by private persons. Then silver also disappeared as a medium of exchange in the last centuries and the fact remained that the commodity gold was used as the medium of exchange. The function of the government consisted of producing small pieces of this medium of exchange, the weight and content of which was determined by the government offices and acknowledged by the laws and by the courts. I cannot enter into the whole history of money. But what resulted was the gold standard. The system of the gold standard, the gold exchange standard, is practically the only monetary system in the world. This was not done by governments; it was done through the market; it was done by parties exchanging on the market.

In the history of money, which is identical with the history of government attempts to destroy money, we must distinguish two great periods. And these two periods are not separated from one another by some monetary fact or by some specific monetary problem — they are separated from one another by the great invention made in the 15th century by a man named Gutenberg. If the governments need more money — and they always need more money because they don't earn it — the simplest way for them to increase the quantity of money since Gutenberg is just to print it.

Just as the government says "dollar" — but let us not use the term of a country with money which still functions today — let us say "ducats." You have agreed upon a definite quantity of ducats. And then, because the government doesn't want to restrict its expenditures, it declares: "What I have printed in my printing office, in my government printing office and called a Ducat is also a Ducat, the same thing as a gold Ducat." These things started when there were private banks to which the government gave privileges. At the time you made this agreement a Ducat meant a definite quantity of gold. But the government now says it is something else. When the government does this, the situation is similar to what it would be if you agreed to deliver a horse to another party but instead of a horse you delivered a chicken, saying, "This is all right … I say that this chicken means a horse." It is such a system that destroys the markets, you know.

I want to say something about the reason why the gold standard was adopted in the first place and also why today it is considered as the only really sound system of money. It is because gold alone makes the determination of the purchasing power of the monetary unit independent of the changes in ideas of governments and political parties. Gold has one advantage. It cannot be printed. It cannot be increased ad libitum [at pleasure]. If you think that you, or an institution with which you are connected doesn't have enough gold money, you cannot do anything about it that would increase the quantity of gold money in a very simple and cheap way. The reason why there is the gold standard, why the gold standard was accepted, is that an increase in the quantity of gold costs money. Gold is restricted; it is limited by nature; the production of an additional quantity of gold is not cheaper than the acquisition of such a quantity by exchanges on the market. That means that the metal gold was used as a medium of exchange.

Governments and writers for governments make fun of the fact that the world, the nations of the world, consider gold as money. They say a lot of things against the gold standard. But what they say is not what matters. What matters is that, without any interference on the part of a central authority, without any government action, individuals chose gold as "money" through the process of trading on the market. People make jokes about the uselessness of gold. It is just a silly yellow metal. We can't eat it, they say. It is only good for dentists and for unimportant things like jewelry. There are people who say, "Why gold? Why use precisely this yellow metal as money? Leave the gold to the dentists. Don't use it for monetary purposes." Now I do not have the right to talk about the dentists; I use the dentists only as an illustration. Whether they want the gold is another question. Lord Keynes called the gold standard a "barbarous relic." Many books say that the government had to step in because the gold standard failed. But the gold standard didn't fail! The government abolished the gold standard by making it illegal to hold gold. But still today, all international trade is calculated in gold. Critics have no valid arguments against the gold standard because the gold standard works while the paper standard of the government does not work, not even in a way which the government itself considers satisfactory.

The advantage of this gold money system, as of every system of non-governmental money, is that an increase in the quantity of money does not depend on decisions of the government. The advantage of the gold standard is that the quantity of gold available is independent of the actions, the wishes, the projects and, I would say, of the "crimes," of the various governments. Gold may not be 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 gold to a greater extent than such changes are occurring daily again and again in everything. We can therefore live, we can therefore exist, with the system of gold money. With gold money, there is no danger that a great revolution in prices will be brought about. The advantage of the gold standard is not that gold is yellow and shiny and heavy, but on account of the fact that the production of gold, like the production of everything else, depends on actors who cannot be manipulated by the government in the way in which the government can manipulate the production of government paper money. When the government prints a piece of paper, it doesn't cost more to print "100" than it does to print "10" or "1" on this same piece of paper. And the market situation, the situation for all human exchanges, the whole economic system is undermined, destroyed, by the governments when they consider it advisable to increase the quantity of money by increasing the quantity of government money. The monetary crisis, the monetary problem which faces the world today is due to the fact that the governments think they are free to do anything they want with regard to money, you know. Not only do individuals sometimes fail to fulfill promises they have made, but governments do the same. They have already used practically all possible methods of trying to evade the necessity of paying what they have promised. And this is the problem which we have now.

Legal tender legislation made it impossible for anybody to refuse to accept the paper money. Gold clauses were written into some contracts by some people in the attempt to protect them against the legal tender laws which would force them to accept paper. To give an example, there is a country in Europe, a very nice country with a great history, considered even today as one of the most civilized countries of the world. I don't want to give the name of the nation, but let us call it Utopia. This country issued a loan, a public loan. On every page of this loan there was inscribed: "This government promises to pay 20 pieces of Utopian gold money, that is a definite quantity of gold coins in the coinage of this nation, that amount in gold, or an equivalent quantity in American dollars redeemable in gold according to the McKinley standard." The man who bought this obligation, this letter of indebtedness, would have said: "I am really protected against all accidents. It has happened in the past that a country did not pay the same weight of gold which it had promised to pay. But now I have the promise not only of being paid in gold, but I also have the power to choose. I can ask them to pay me in the Utopian national currency, or the equivalent in American dollars, which are redeemable in gold." Then in 1933 the United States changed the "price" of gold, as you know; it reduced the ratio of gold to the U.S. dollar. In 1935 the U.S. Supreme Court ruled that, as the bondholders had received payment in legal tender notes, they could not show damage and would not be paid in gold. This country of Utopia said, "We also accept this new 'price.' We will pay you, the bondholder, only the lower quantity of gold according to the new American law, a law which didn't exist at the time we sold you this obligation when we bound ourselves to pay to you." That means the right of governments concerning money is considered as something quite special today, something which is not subject to the general conditions and practices of the market economy. This precisely is the reason for the monetary problem which we now have.

All this was possible only on account of the fact that government is the institution that determines what the agreements between the citizens mean, what the content of these agreements are. Government has the power to force people who, according to their government's declaration, do not comply with their agreement to pay the sums required. And as the government assumes, necessarily, that the courts should have the power to declare whether or not the parties have complied with an agreement concluded between them, so do the governments presume that they alone have the power to declare what money is and what money is not. Just as the courts have to determine if there is a conflict between the parties to an agreement as to whether a certain thing referred to in a contract is wool, for instance, or is not wool, so do the governments presume to say whether a certain thing is money or is not money of a certain definite quantity. And in this way, again and again, governments have destroyed the markets of the world. And in destroying the markets they have gone so far as to destroy completely the system of money, making it necessary to develop a new monetary system. What we have to realize is this: Every kind of human arrangement is connected in some way or other with money payments. And, therefore if you destroy the monetary system of a country or of the whole world, you are destroying much more than simply one aspect. When you destroy the monetary system, you are destroying in some regards the basis of all interhuman relations. If one talks of money, one talks about a field in which governments were doing the very worst thing which could be done, destroying the market, destroying human cooperation, destroying all peaceful relations between men.

The fact is that with the gold standard it is possible to have a monetary standard that cannot be destroyed by the governments. There is no reason to give to the governments greater influence over monetary problems. While it is really absolutely correct to say that it is just an accident that it is precisely gold and not something else that serves this monetary purpose, the fact is that with the gold standard it is impossible for governments to destroy the monetary system. On the other hand, there is nothing easier for governments to do than to destroy a system of money which is based upon too much confidence in the government. Gold Inflation The gold standard is due to an accident, a geological accident, I would say, that there is only a limited quantity available. Because its quantity is limited, it has value on the market so that we can deal with it as money. The main thing with regard to money is the question, how to restrict, how not to increase, its quantity. You know gold too can increase in quantity even if you have the gold standard. In the last 200 years it happened again and again that the increase, that the discovery of new fields in which gold, additional quantities of gold, could be produced, brought about a slight drop in the purchasing power of every gold unit as against the purchasing power of the gold unit which would have remained in the absence of this new discovery. This same tendency toward higher prices was then brought about not only by an increase in the quantity of paper money but also by an increase in the quantity of precious metals. For instance, in the years 1848 to 1849, there was discovered gold in California and Australia. For a definite period a new quantity of gold, above the regular yearly increase in the production of gold, was flowing into the market. Lots of people went to these gold fields, tried to mine gold, and when they did find gold they spent it. The result, therefore, was that these gold miners took away from the markets more produced goods than they had taken before.

If, for instance, a poor man, who had not formerly consumed very much, went to California or Australia, and had some success in gold mining, he was then able to buy things with his gold and to live in a very comfortable manner. Within a very short time, within a few months or years, there developed towns in California, places where the gold miners lived very agreeable lives. The gold miners received in exchange for the gold real things. Where only a short time before there had been nothing but forests and swamps, there were cities, houses, furniture and imported bottles of champagne. And where did all these things come from? From the rest of the world. And what did the rest of the world, the producers and suppliers of the goods and services get in exchange for the things the gold miners bought? Higher prices! They received gold, of course, but they had to pay more for the things they wanted to buy. The effect of these great gold discoveries was that the purchasing power of each individual piece of gold was now lower than it would have been in the absence of the gold discoveries. You can, if you want, call it "inflation;" it brought about effects similar to those of a paper money inflation.

That is, in the middle of the 19th century the new gold discoveries brought about what people considered at that time as a price revolution, or something like that. But the production of additional money, gold money, was limited; it was almost without any quantitative influence upon the great markets of the whole world. When the only real money which was used was gold money or bills which were redeemable, convertible into gold, bills giving you the right to get a quantity of money, then as the quantity of gold was increasing, there was a drop in its purchasing power. And adjustments were taking place which were necessary in order to bring this in order. But this drop in purchasing power was limited because the additional quantities of gold were very soon integrated into the whole monetary system and there were no farther extraordinary increases in the quantity of money. Now these gold discoveries are exceptional cases and we do not have to deal with them. People may make jokes about the gold standard, suggesting that one should leave the gold to the dentists, that gold is absolutely unnecessary for money, and that besides it is a waste of money and work to use as money something that has to be produced at such a high cost as gold. But the gold standard has one quality, one virtue; it is that gold cannot be printed, and that gold cannot be produced in a cheaper way by any governmental committee, institution, office, international office, or so on. This is the only justification for the gold standard. One has tried again and again to find some method to substitute these qualities of gold in some other way. But all these methods have failed, and will ever fail precisely as long as the governments are committed to the idea that it is all right for a government that has not collected enough money to pay its expenses by taxing its citizens, or from borrowing on the market, that it is all right for such a government to increase the quantity of money simply by printing it.

Now there is a doctrine that says there is not enough gold. The reason why these critics of gold are against the gold standard is due to their belief that the quantity of money must be increased. Now the quantity of money adjusts itself necessarily through prices to the demands of the public. Yet, there are authors, professors, textbook writers, who tell us there is not enough money and they suggest a paper currency and regular yearly increases in the quantity of money. They don't know what they are talking about. Some of these textbook authors give another figure in every new edition of their textbooks by which they want to increase the quantity of money. In one edition they say 5%, in the next edition they say 8%, and so on. If a professor says that we should have a paper currency and that every year the government should add 8%, or 10%, or 5% additional new money, he does not give us a full description of what has to be done. This is perhaps an interesting fact to help us realize, let us say, the mentality of these authors, but it is not the problem which we have to deal with. The question is how the government should bring this money into circulation, to whom should it be given. What we have to realize is that the increase in the quantity of money cannot be neutral with regard to the conditions of the various individuals.

It is, of course, rather puzzling that one has no other method of organizing the system of exchanges than by the use of a definite metal, a yellow metal, gold. One may ask the question: "What would have happened if there hadn't been any gold?" Or one may ask the question: "What will happen one day," nobody can say anything today about it, "if people discover a method to produce gold at such a cheap price that gold will no longer be useful for the monetary purpose?" To this question, I answer: "Ask me again when this is the case." Perhaps — I don't know, nobody knows — perhaps one day people will discover a method of producing gold out of nothing, or, let us say, out of non-gold. Perhaps gold will become as plentiful as air, and free to everyone. If everyone could have as much gold as he wanted, it would have no value on the market. No one would then be willing to take such a value-less commodity in trade for other goods or services and it would not then become a "medium of exchange." If you have sleepless nights and have nothing else to think about, you could think about what will happen, you know, if one day gold could be produced in such a cheap way as, let us say, paper can be produced today. It could happen! But nobody thinks it will happen. It probably will not happen. But if it does happen then people will have to deal with the new problem. And perhaps they will solve it; perhaps they will not solve it; we don't know that today. But it is useless today to speculate what will happen, if this should happen. And as we don't know anything about what the conditions will be at that time, we can say, "Let us wait. Let us wait to see whether really one day gold will be so abundant that it can no longer serve monetary purposes." All right. If this should happen, the people living then — at that time — would have a problem to solve. But today we have another problem. Our problem is to keep the quantity of money from being increased and its purchasing power from being decreased through inflation. Inflation The first rule, or the only rule which we have to teach to everybody in explaining the problems of money is that 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, a temporary improvement of the situation. But if so, why do it today only and not repeat it tomorrow? This is the only question. And this is the problem of inflation. The problem is not to increase the quantity of money. The problem is to increase the quantity of those things which can be bought with money. And if you are increasing the quantity of money, and you are not increasing the quantity of things which can be bought with money, you are only increasing the prices which are paid for them. And in time, if the increase in money continues, the whole system becomes a system without any meaning and really without any possible method of dealing with it.

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 taxes for this purpose, then let us add a little bit, a little bit of paper money, not very much, just a little bit, you know. I would like to attack the problem from another point of view and say: "There is nothing in the world less fit to serve as money than paper, printed paper." Nothing is cheaper. And practically what we have to say is that the governments are destroying the whole economic system of the market economy by destroying the monetary system. One could compare this printing of paper money, and people have, with what has happened in the field of the use of various drugs. Just as when you start to use certain drugs you don't know when to stop nor how to stop, it is the same with the printing of paper money, the governments don't know when nor how to stop. Prices are going up because there is an additional quantity of money, asking, searching for a not-increased quantity of commodities. And the newspapers or the theorists call the higher prices, "inflation." But the inflation is not the higher prices; the inflation is the new money pumped into the market. It is this new money that then inflates the prices. And the government asks, "What happened? How should one man know? How should I, the man in the department of finance, know that this additional money is really spent and that this spending must raise prices because the quantity of goods did not increase?" The government is very innocent. It doesn't know what happened, you know, because this happened in another department of the government.

And the governments try to find somebody who is responsible — but not the government. They consider the man who asks for higher prices responsible. But he must ask for higher prices because there are now more people wanting to buy his produce, you know. He has 100 units to sell each at 5 pieces of money. And now people are coming — not with 500 but with 600 pieces of money in their pockets — and the buyers must, therefore, in order to prevent other men from getting the things they want, pay higher prices. Now we have the inflation. Years ago, many, many years ago — 60 years ago — I wrote my first essay dealing with the problems of money. It was a study about the inflation in Austria and the way in which one day the government decided to abandon the inflation and to return to stable money in spite of the very heavy opposition of the party that was dedicated to the brilliant old system of inflation. I gave this essay to my teacher, Böhm-Bawerk, for publication in his economic magazine which he published with some friends. And one of his friends, a former Minister of Finance, Dr. Ernst von Plener, having read the manuscript, invited me to talk with him about the manuscript, about the problem. He was very interested in view of the fact that he was one of the Ministers of Finance dealt with in this essay. We had a very interesting conversation and at the end of this conversation, Dr. von Plener said, "It's a very interesting study that you have given to our magazine. But I am astonished that a young man like you is interested in a problem of the past like inflation. There was really, in the 19th century, in almost every country of the world, inflation. But it will not return. This will never come again. Can you imagine that the British Empire, Germany, France, the United States, will go off the gold standard? No! Impossible! And the fact that these countries will keep to the gold standard will force all the other nations also to remain with the gold standard."

I said, "I would like to be of your opinion. But as I look around in the literature about money and what is being written and published every day, also in the United States, also in England, and so on, about this problem, then I see, or I believe I see, a tendency toward a return to these problems of inflation." And I think I was right! Twenty years later, after the First World War, after all those things that had happened after the War, Dr. von Plener told me, "Remember our conversation. You were right and I was wrong. But your opinion would have been better advice for these countries." I admitted that without any difficulty. And I would have to admit it today again. In the years after the First World War, American economists frequently visited Vienna and I had the pleasure of talking with them, and explaining inflation and conditions as they prevailed at that time in Austria and in other European countries. And, as you know, when people are talking about economic problems, they are talking and talking until finally it is late in the evening, very late in the evening. And so it was. Then I told them, "I will now give you an explanation as to why conditions in the country are not so satisfactory. I will take you for a little walk to the center of the city, past a definite building." This was at 11 o'clock or midnight. And we went. It was very quiet. But then they heard a noise, the sound of the printing machines that were printing banknotes day and night for the government. The result in Vienna was very modest you know; the American dollar which had been five Austrian crowns became 14,000 or 17,000 Austrian crowns. The inflation was bad, you are right. But this was a very modest inflation; the achievement of inflation in Germany was much greater you know. It took billions of marks you know to make one U.S. dollar. You consider this a joke, but it was a tragedy of course. For the people whose property it destroyed, it was a catastrophe. Inflation today is probably the most important phenomenon in political life and political conditions. Fortunately there is still in this country, and I hope it will succeed one day, a very reasonable opposition against inflationary measures. But for many governments it is simply a question of being in a situation of needing more money and they think it is perfectly reasonable to increase the quantity of money. If we want to have a system of money that works and operates, one must not increase the quantity of money 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; what reference does it have to the problems of daily policies, monetary policies. It has a very important reference. The reference is that when you are operating with something that can be a deadly poison, not always but it can be, then you must be very careful. You must be very careful not to go to a certain point. This is something which one may also say about all the medicines that influence the nerves and minds of people. The doctor saves the lives of some people by giving them some chemical in a quantity which he precisely determines and knows. And if the quantity were increased up to a certain point, then the same chemical would be a deadly poison.

We have a similar situation with inflation. Where does inflation start? It starts as soon as you increase the quantity of money. And where does the danger point begin? That is another problem. The question cannot be answered precisely. People must realize that you cannot give a statesman advice: "This is the point up to which you may go and beyond this point you may not go, and so on, you know." Life is not as simple as that. But what we have to realize, 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, the increase of those things which have the power to be used for monetary purposes, must be restricted at every point. The real problem is that we have a quantity of money in most countries, including the United States, a quantity that is continually increasing. And the effect of this increase is that prices of commodities and services are going up and people are asking for higher wages. And the government says this is "an inflationary pressure." I see this word a hundred times everyday in the newspapers, but I don't know what "an inflationary pressure" is. There is no such thing as "an inflationary pressure." Nothing is inflationary except an increase in the quantity of money. Either there is an increase in the quantity of money, or there is no increase in the quantity of money. There is a practical solution from the theoretical point of view — the gold standard. As long as we are using as a medium of exchange the precious metal gold, we have under present day conditions no special problems to deal with. But as soon as we are increasing the quantity of paper money, 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. We 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. But then 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 the market. And this is what counts. Inflation Destroys Savings

Everything that is done by a government against the purchasing power of the monetary unit is, under present conditions, done against the middle classes and the working classes of the population. Only these people don't know it. And this is the tragedy. The tragedy is that the unions and all these people are supporting a policy that makes all their savings valueless. And this is the great danger of the whole situation. The conditions under which people are living in the industrial countries of the west, which today means in practically all the countries where the standard of civilization has made some progress since the 16th or 17th century, the masses are in a position, fortunately, in the years in which they are able to work, in which they are in full health, to provide for the state of affairs as it will prevail in later years when they will either be absolutely unfit to work or when their capacity to work will have decreased on account of old age or other changes. Under conditions as they are today, these people can only provide for their old age practically by either entering into labor contracts which give them a pension for their later age, or they can save a part of their income and invest it in such a way that they can use it in later years. These investments can be either simple savings deposits with banks, or they can be life insurance policies or bonds, for instance, government bonds which appear in many countries as perfectly safe. In all these cases the future of these people who are providing in this way for their old age, for their families and children is closely connected with the purchasing power of the monetary unit.

The man who owns an agricultural estate, the producer of oil or of foods, or the businessman who owns a factory is in a different position. When the prices of the products which he is selling go up on account of the inflation, he will not be hurt in the same way in which other people are hurt by the inflation. The owner of common stock will see that, by and large, most of this common stock is going up in price to the same degree as the prices of commodities are going up on account of the inflation. But it is different for people with fixed incomes. The man who retired 25 years ago with a yearly pension, let us say of $3,000, was by and large in a good situation or was believed to be in a good situation. But this was at a time when prices were much lower than they are today.I don't want to say any more about this situation and the consequences and effects of inflation for the people. What I want to point out is that the greatest problem today is precisely this, although the people don't realize it. The danger is due to the fact that people consider inflation as something which hurts other people.They realize very well that they too have to suffer because the prices of the commodities they are buying go up continually, but they don't realize fully that the greatest danger for them is precisely the progress of inflation and the effect it will have on the value of their savings.

All over Europe today you see unrest due to the fact that the European masses are discovering that they have been the losers in all these financial operations which their own governments have considered as a very wonderful thing. And, therefore, also from the point of view of making it possible for the masses to enjoy the improvement of economic conditions and to make them partners, real partners, in the great development of industrial production that is going on practically now already in all countries of Europe and North America, even including Mexico, it is necessary to abandon the policy of inflation. The great unrest that is today characteristic of everything that is going on in Europe, the revolutionary ideas of the masses, especially of the sons of the middle classes who are studying at the universities, are due to the fact that the European governments, with the exception perhaps of the government of the little country Switzerland and other such very small countries, have in the last sixty years again and again embarked upon a policy of limitless inflation. When talking about conditions in France, one should not overlook what inflation actually means. The French were right when, in the nineteenth century and in the beginning of our century, they declared that the social stability and the welfare of France is to a great extent based upon the fact that the masses of the French population are owners of government-issued bonds and therefore consider the financial welfare of the country, of the government, as their own financial advantage. And now this has been destroyed. Frenchmen who were not in business themselves, i.e., the majority of the population, were fanatical savers. All their savings were destroyed when the tremendous inflation reduced the value of the franc to practically nothing. The French franc may not have declined completely to zero, but for a Frenchman, who had $100 before and then had only one dollar — for such a Frenchman, the difference was not very great. Only a very few people can still consider themselves owners of some property when their property is reduced to 1% of what it was before.

In talking about inflation, we should not forget that over and above the consequences of destroying a country's monetary standard, there is the danger that depriving the masses of their savings will make them desperate. For decades there were only a very few who would agree with me in this position. Even so, I was astonished to read today in Newsweek that the majority of the people in the nation are not interested in the preservation of the purchasing power of the monetary unit. Unhappily, the article did not say that the destruction of the savings of the masses was a much more serious matter than the "famous" war now being waged on poverty. It is ridiculous for the government to finance a "war on poverty" by taxing, inflating, and spending, and so sacrificing the savings of the masses who are trying to improve themselves through their own efforts. This is one of the many contradictions which we have in our political, not our economic, system. To explain what I have in mind, consider the dreadful contradiction of the American government when it says: "We have to wage a war against poverty. Certainly many people are poor and we must make them wealthier." And yet this government taxes the people in order to make bread more expensive. You will say, "So, bread is more expensive; this is an exception." But it is not an exception! The American government spends also billions of tax money in order to make cotton more expensive. Cotton goods are certainly not luxury goods; they are perhaps luxury goods when compared with bread, but the government does the same thing, it follows the same policy, with bread.

The real war on poverty was the "industrial revolution" and the industrialization of modern factories. At the beginning of the nineteenth century, shoes and stockings were luxury items for most of the people of continental Europe; they were not articles of daily wear. And the condition of these people was not improved by taxing, by taking money or shoes from the rich to give to the poor. It was the shoe industry, not the riches of the government, that improved the condition of the poor, that made a revolutionary change in the peoples' condition. A statesman may say, "If I had more money to spend I could do things which would make me very popular in my country." The government tries to make itself popular by doing these things, but the technique it uses is to spend; and then it tries to ascribe to itself the good results of an expenditure. An expenditure is not always good. Sometimes an expenditure is just buying bombs and throwing them into a foreign country. But if the expenditure is beneficial, let us say if it makes it possible to improve some things in the country, then the statesman says, "Look, you never had such a wonderful life as you have under my regime. There are some bad people, some inflationists, some people who are profiteers, but I have nothing to do with them. This is not my fault." And so on.

Our economic situation depends largely on the relation of the government and the ruling political party or parties to the labor unions. We have "inflation," in the sense of higher prices, built into our economic system because the unions every year, every two years, or in exceptional cases every three years, ask for higher wages. The great majority of workers want continually higher wages and they assume wages can be manipulated ad libitum, at will, by the government. The unions have the power, by using violence, with the aid of certain laws and of certain institutions in Washington, to force people to agree to their wage demands. If wages do not continue to go up, no one knows what will happen. The only possible solution to the inflation problem is an open opposition to the unions and to the idea that higher money wages are the only means for improving the condition of the masses. Union members should also realize that their conditions would improve if the money prices of the things they wanted to buy went down, even if their money wages did not rise. I do not want to say anything more about this problem except to add that the government started it when it began to increase the quantity of money by printing it. To give an example of how inflation destroys savings, there was in a European country a poor boy educated in an asylum for orphans, very well educated because when he had finished school and his life in the orphanage he emigrated to the United States. In the course of a long life he accumulated a considerable fortune by producing and selling something which was very successful. When he died, after living 45 years in the United States, he left a considerable fortune of $2,000,000. Not everybody leaves such a fortune. this was certainly exceptional. This man made a will according to which this $2,000,000 was to be sent back to Europe to establish another orphan asylum such as that in which this man had been educated. This was just before World War I. The money was sent back to Europe. According to the usual procedure it had to be invested in government bonds of this country, interest to be paid every year to keep up the asylum. But the war came, and the inflation. And the inflation reduced to zero this fortune of $2,000,000 invested in European Marks — simply to zero. To give another example, a German who in 1914 owned a fortune which was the equivalent of US$100,000 had left from that fortune nine years later one-half cent perhaps, something like that, or five cents — it doesn't make any difference; he had lost everything.

And there were similar experiences in the European universities. For instance, lots of foundations were set up in the course of centuries by people who wanted to make it possible for poor boys to study at the university and to achieve what they had achieved from the good education they had gotten at these universities. And what happened? In all these countries, in Germany, France, Austria and Italy, there came great inflations. And these inflations again destroyed these investments. For whose benefit? For the benefit, of course, of the government. And what did the government do with the money? It spent it; it threw it away. People still believe, however, that destroying the value of the monetary unit is something that does not hurt the masses. But it does hurt the masses. And it hurts them first. There is no better way to bring about a tremendous revolution than to destroy the savings of the masses which are invested in savings deposits, insurance policies, and so on. An example of what I mean was furnished by the president of a bank in Vienna. He told me that as a young man in his twenties he had taken out a life insurance policy much too large for his economic condition at the time. He expected that when it was paid out it would make him a well-to-do burgher. But when he reached his sixtieth birthday, the policy became due. The insurance, which had been a tremendous sum when he had taken it out thirty five years before, was just sufficient to pay for the taxi ride back to his office after going to collect the insurance in person. Now what had happened? Prices went up, yet the monetary quantity of the policy remained the same. He had in fact for many, many decades made savings. For whom? For the government to spend and devastate.

If you talk about a catastrophe of the money, you need not always have in mind a total breakdown of the currency system. Such a thing did occur in this country in 1781 with the so-called "Continental Currency." And it occurred in many other countries later, for instance, the most famous inflation, the breakdown of the German mark currency in 1923. These changes are not the same, nor to the same degree in various countries. But one should not exaggerate the difference in the effects brought about by the greater inflations as against the smaller inflations. The effects of the "smaller inflations" are also bad.

We must realize that in the market economy, in the capitalistic system, all interhuman relations that are not simply personal and intimate, all interpersonal relations, are expressed, made, counted in money terms. A change in the purchasing power of money affects everybody and not in such a way that you can say it is beneficial if the purchasing power of the money is going up or down. All our relationships, the relations between individuals and the state, and between individuals and other individuals, are based on money. And this is true not only for the capitalistic countries. It is true for all kinds of conditions. For instance, in predominantly agricultural countries in which the small- or medium-sized farm prevails, it is usual, necessarily usual, that at the death of the owner of such a farm, one of his children takes over the farm and the other children, the brothers and sisters inherit only a part of the farm. The man who gets the farm has to pay to the others in the course of his life, step-by-step, the share of the inheritance which is theirs. That means that the man who inherits the farm gets no more and no less than the other members of the family. But when this is arranged by transferring the property to one heir and giving the others claims in money terms against this heir, claims to be settled in the course of the years, this means that everyday, if there is an inflation in progress, the share of the man who got the farm is increasing and the shares of the other brothers and sisters are sinking. We have had in this country, continually now for several years, an outspoken inflationary increase in the quantity of circulating money. However, conditions are influenced by this situation. There has been a general rise in prices. You hear about it; you read about it; people compare prices and talk about it enough. Yet I shouldn't exaggerate what has happened already to the dollar. What has happened to the dollar is still not something that makes a catastrophe unavoidable. If you were to go to certain other countries — Brazil or Argentina, for instance — you would be in a country which also has inflation, but a much bigger inflation. And if you ask a man in Brazil what he considers a stable money which does not drop in purchasing power, he would say, "The U. S. dollar … that's wonderful!" Of course, when compared with his country's money. The problem of money, the practical problem of money today in the whole world is precisely this: The governments believe that in the situation which I have pointed out before, when there is a choice between an unpopular tax and a very popular expenditure, there is a way out for them — the way toward inflation. This illustrates the problem of going away from the gold standard.

Money is the most important factor in a market economy. Money was created by the market economy, not by the government. It was a product of the fact that people substituted step-by-step a common medium of exchange for direct exchange. If the government destroys the money, it not only destroys something of extreme importance for the system, the savings people have set aside to invest and to take care of themselves in some emergency; it also destroys the very system itself. Monetary policy is the center of economic policy. So all the talk about improving conditions, about making people prosperous by credit expansion, by inflation, is futile! Inflation and Government Controls Human cooperation can be organized according to two different models. One is the model of absolute rule by one ruler only, the socialist model — everything is organized under the leadership of a leader, der Führer. The term is not very much used in the Anglo-Saxon language because people did not think of it as a system that can really work. But in the countries in which socialism prevails the term, der Führer, the leader, is very well known. In those countries everything depends upon this autocratic regime; everybody has to obey the orders issued from one central authority. People who like the system call it "order;" people who don't like it call it "slavery." This system in which people must obey the orders issued from a central authority is very well known to anybody who has served in an army. For the army, it is the only possible system. If one criticizes the centralized system, we must not forget that it is suitable only for a special purpose, for the special end which it can attain. The characteristic of the market is that government does not issue orders that the people must obey; it does not control prices; prices and wages are determined by demand and supply on the market. This system is the system that brought about the constitutions and all those commodities and services which together can be called modern civilized life. The opposite of the market is the abolition of the market and its substitution by the socialist or communist state. That means planning, central planning, where everything is determined by decrees and orders of the government.

Government officials cannot ignore public opinion; they cannot ignore the ideas and practices of the people. The government is never in a position to make any laws it wants. It cannot afford to take into consideration only the views of the people who are running the government. So laws tend to follow accepted practices and theories. And that is true in the field of money too. With respect to money, government must accept and acknowledge the money that has evolved out of the actions and ideas of individuals. Let us take the following political situation. The government wants to spend more than it has spent up to yesterday, but it doesn't have the money. And it doesn't want to tax more, or for political reasons it simply cannot tax more. Nor can it borrow the money, because from their point of view conditions for borrowing appear unsatisfactory. The government wants to spend more and doesn't want to tax the people. The government wants to appear as Santa Claus, which is a very agreeable situation, a more popular situation than that of a tax collector. Therefore, the government does not tax the people to get the money for its new expenditure; it inflates; it prints the money. The important point to remember regarding inflation is that, while the money in circulation is increased, other things remain unchanged. This inflation is very cheap, you know; it is a very cheap procedure. What happens then? Prices go up. The government, of course, wants a way out, a solution, so it is apt to try price-fixing. The government fails to recognize the fact that if the public really obeys its price-fixing orders, sellers will sell their entire supply of commodities to regular customers at the former or fixed prices with the result that those into whose pockets the additional money goes will find nothing to buy.

I want to give a typical example of how government price controls work. In the First World War and again in the Second, the German government and the English, among others, embarked upon inflation as a means of financing the war. The addition of new money to that already in circulation brought about an up-trend in prices which the government did not like. The government wanted business as usual. But it was obviously not business as usual. Therefore, the German government, as well as others, resorted to price controls. Now, if prices are fixed below what they would have been in the unhampered market, high cost producers are bound to suffer losses. The government starts, let us say, by fixing the price of milk. As a result, the higher-cost producers cease bringing milk to the market and convert their milk into other end products, butter, for example. Thus, the quantity of milk on the market not only does not increase, but actually decreases, precisely the opposite of what the government wanted. The government wanted milk to be more readily available to the average family, but the quantity of milk decreases. When the government approaches the producers for an explanation, their answer is that they would have suffered losses in producing milk because of the price they had to pay, let us say for fodder, and, therefore, they turned their milk production into butter for which there was no fixed maximum price. The government then price-fixes fodder. And then the same story is repeated with fodder. Thus, the government continues step-by-step until it reaches what the Germans in the First World War referred to as the "Hindenburg Plan," a complete socialization of everything.

The German government broke down at the end of the War. But several years later the Brüning government reinstated price controls which Hitler carried to their final conclusion. Price controls transformed private ownership and private production into a system of complete government control of everything. German communism, national socialism, under Hitler did not legally expropriate the owners of the means of production, but every economic step was determined by government. There were still entrepreneurs, although the name "entrepreneurs" was eliminated; they were called "shop managers." They were at the head of business organizations, but they had to comply completely and exactly with the government orders. They had to buy raw materials at prices set by government, sell to other firms at prices determined by government, and employ workers assigned to them by government. There is no third economic system which makes it possible on the one hand to have a free market and on the other hand to avoid socialism or communism. Interference with the market inevitably brings about effects which, from the point of view of the interfering authorities, are even worse than the state of affairs they wanted to alter. In order to make the system work the authorities go farther step-by-step until they bring about a situation under which the initiative of everybody else is destroyed, and everything depends on the authorities, upon the leadership of government.

The reason we do not have price controls here today is because of the experiences in other countries. Again and again the government repeats that we need to control prices. Yet it does not tell the cigarette manufacturers that it is forbidden for them to raise the price of a pack by one cent. Instead the government tries to talk with the cigarette manufacturers and with the representatives of a thousand other firms so as to pressure them. While the government has not as yet embarked on price control it hasn't really done anything to prevent the present system from operating in a way it does not like. As a matter of fact, quite the contrary. It has built inflation into our present system — inflation even in the popularly-accepted meaning in which the government uses the term, that is higher prices. We see, therefore, that the problem of money is much more than only the problem of the organization of the market. The market is today fighting for its independence and existence. The government tries to interfere with the market and we are now just one day, one year, nobody knows how far away from what is called control of prices. And that means the abolition of the market. Money, Inflation, and War Now, one may say that there are situations when the government is forced to increase the quantity of money, when it is the highest wisdom on the part of the government to proceed in this way. Such a situation would be when the country is menaced by invasion by foreign armies. What can the government do then? It must spend more. And as the people are not paying enough in taxes and the government can't tax them any more because they don't have more money, the government has to print money. To see if this reasoning is correct, let us now talk about historical problems.

What does this mean that there are some situations in which you cannot avoid inflating? One talks about one particular case — war! Now, please! In a war governments needs armaments and various other things in order to defend the country — I don't want to enumerate them. All these things must be produced and they cost money. If the citizens are not prepared to supply the armaments or to give the money to pay for the armaments, then their country will be defeated in the war, and the country will become dependent. But an increase in the quantity of paper money does not change this. There can be certain conditions under which the government inflated and you can say the situation was such that the alternative to inflation, to increasing the quantity of money, was also very bad. When the American colonies were fighting against England in the War of Independence, they proceeded to inflation. The alternative, let us assume, would have been defeat, because certainly in the eyes of the men responsible for this inflation, for this increase in the quantity of money, this was the alternative. You can say that, if it was really possible to preserve the independence of what later became the United States through inflation, then the inflation was justified. The catastrophe couldn't be avoided then. But the catastrophe, the breakdown of this currency in 1781 after the Revolutionary War, did not mean the same thing that it would have meant years later when the economic conditions changed. In the years of the Revolutionary War the American colonies were a predominantly agricultural country; most of the people were owners or workers of an agricultural piece of land and could survive the catastrophe which the breakdown of the American currency, the Continental Currency, meant after the Revolutionary War. Getting food was not then a matter of going to the market. They didn't use money to buy food or hardly any other things. When the Continental government inflated in 1781, the man who had a small farm and who worked with his family on this farm and had a few dollars, he lost these few dollars because of the inflation, but that didn't affect him very much. Therefore, the whole problem of inflation was only of minor importance for the Americans at the end of the Revolutionary War.

We cannot compare conditions today in the United States with those in the United States of 1781. Today we no longer have the simple system which existed at that time under which the money economy meant very little for most people. We have had other such examples in the past. But under the conditions of a highly developed society, under the division of labor under the conditions of society in which practically everybody depends on working for other people and is paid by money and uses this money in order to buy things, under these conditions which I do not have to describe because they are known to everybody, a breakdown of the currency would mean something quite different. There is no excuse for a government that resorts to inflation today saying, "But, don't forget, we have an old tradition of inflation. We are an independent nation today because we had an inflation in the War of Independence, in the Revolution." You cannot compare conditions.

There was also, for instance, the great problem of the United States, the greatest historical problem for the United States, the Civil War in the 1860s. There were the Northern States and the Southern States. And the Southern States were in a very bad situation because they had very little industry. Their agricultural production was great, but their industries were not in a position to produce the needed armaments. From the first day of the Civil War, this was a very unfortunate situation for the Southerners especially as the Navy of the North was in a position to prevent trade between the Southern States and the European countries which would have been in a position to deliver armaments to the South. Now it is impossible to improve a country's military situation by inflation, even in a country in which all the materials required for the war are available. Therefore, even from the point of view of the necessities of a situation in which a country is fighting for its survival, inflation as such is not a measure to improve conditions. Now the shortage of armaments could be affected in no way by the fact that the secession government increased the quantity of money. But if you were a statesman in the Southern States and you were already approaching defeat, and somebody asked you, "Don't you know that printing money, banknotes, more and more dollar bills of the southern quality, will destroy this system?" this southern statesman would have answered, "Why are you talking about the money? The problem now is whether the Southern States, our system, which is more important than anything else in the world, should survive or not. Our war, or our rebellion," it depends on how you looked upon this problem, "is finished." He could print money to try to get what was needed to keep on fighting. And so he printed the notes, and more and more notes. And they went to zero.

With the outbreak of World War I, many governments that had not resorted to inflation previously and had provided all the money they needed by taxation, started printing additional banknotes, paper notes. The effect necessarily was an upward movement of prices. The governments were probably not so naive that they did not know what their new methods of providing money for the government spending would bring about. The governments knew that the policy of adding enormous quantities of new additional money into the market would necessarily bring about a tendency toward higher prices. But what did the government do? With the outbreak of the war, with the change in their policies, they also began making laws which punished people who, according to the ideas of the government, were asking higher prices for commodities than they had asked before. What the governments of some countries, of many countries, did in this regard is just unbelievable — I would say it was a "swindle" — they introduced a new crime, a new method of punishing citizens. They declared that there was a special crime of profiteering. And they began to imprison people. Why? Because, these governments said, these people were profiteers; they were asking more than they had before, more than the government thought necessary.

I don't want to say that inflation is a vice and call it "immoral." I don't care for this method of criticizing inflation. But seriously, there is one thing about inflation that we can know for sure. You cannot tell today whether or not people in the government tomorrow or the day after tomorrow will not choose for some reason to increase the quantity of money, that is to inflate. They may have an excuse. They will say: "Inflation is bad. There should never be any question of inflation." And then they will add: "Yes, but we didn't take into account the conditions of an important war. Really this situation didn't exist before." And then they will increase the quantity of money. In one of the many belligerent countries of the last fifty years, there was one Minister of Finance who, when asked "Why do you inflate? Is it not a crime that you are destroying the currency of your country by issuing more money and therefore raising prices?" answered, "In time of war, it is the duty of every citizen of every branch of the government and of every part of the country to contribute as much as possible to the defense of the country. From this point of view, as Minister of Finance, I contributed by printing money."

The Germans before the first World War were highly intelligent and very patriotic. But unfortunately for decades and decades the government and all the professors it had appointed to the universities had taught very bad economics, especially monetary economics. Sixty years ago, a German professor, a teacher of economics of great renown, G. F. Knapp, declared: "Money is what the government says it is. Money is a government product. The government is sovereign and free to do what it wants." He was not saying something new. The only new thing was that a professor was saying it, that all the people in the government said, "All right," and that even those who did not say "all right" acted as it they considered it all right. That meant that the governments claimed the privilege to declare what people had in their minds when they made agreements concerning money. It was not remarkable that the professor said this, you know — professors sometimes say things that are not remarkable. But what was very remarkable was that the people accepted it.

An American economist, B. M. Anderson, predicted Professor Knapp's influence would be such that students would probably "have to read his book if they wished to understand the next decade of German history…. Look at your German theory, look at the German so-called economic doctrine on money and then you will see what will happen to the German money." And he was perfectly right! The result came very soon. When Germany went to war, the government didn't realize, and still less did the people realize, that what one needs to fight the war is not paper money but arms and various other things. So they printed paper money. And they printed paper money day and night. The result was that the German paper money from pre-World War I deteriorated in value. The parity with the American dollar in 1914 expressed in German marks was 4.2 as it had been for 60, 80, and 100 years before. You know what the cost of a postage stamp is. The German monetary policy of increasing the quantity of money, printing it continually, until a German postage stamp in the early 20's of our century cost several million marks. Imagine the situation that developed in 1923 when someone who bought a stamp in order to mail a letter to the next village had to pay several hundred million marks. Twenty million marks was more than the wealth of the richest people in Germany in the earlier period. At the end of this inflation, nine years later, the dollar was 4.2 billion marks, something which is purely fantastic because there are no people who have an idea, a living idea, of what a billion is. This was the outcome of the economic doctrine that money was a creation of the government. The fact that the government had printed money, that the government had increased the quantity of money, did not improve the situation of the German armed forces or the German resistance. It was simply an attempt to deceive the people in Germany and outside of Germany about the effects of the war.

It is true that the Reichsbank printed more and more paper money. But the significance of this famous German inflation of 1923 consisted in the fact that these pieces of paper had legal tender value. Now what did this mean? The government assumed the right to say, not only what money was, but also to decree what people were bound to accept as money. Legal tender legislation makes it impossible for anybody to refuse to accept the paper money. In the same way, the American dollar inflation today [1969] consists of the fact that the paper dollar has legal tender value and at the same time that gold holding is made illegal. Holdings of gold were confiscated and it has been made illegal to deal with gold. The Constitutional Side of Inflation When we talk about these things we must not forget that they do not have only an economic side; they also have a constitutional side. You may say that government is the most important institution. The government is very important in many regards. Perhaps one overrates the importance of the government, but one does not overrate the importance of good government. Modern constitutions, the political systems of all nations that are not ruled by barbarian despots, are based upon the fact that the government depends financially upon the people, indirectly upon the men that the voters have elected for the constitutional assembly. And this system means that the government has no power to spend anything that has not been given it by the people, through the constitutional procedures which make it possible for the government to collect taxes. This is the fundamental political institution. And it is a fundamental political problem if the government can inflate. If the government has the power to print its own money, then this constitutional procedure becomes absolutely useless.

Our whole political system is based upon the fact that the voters are sovereign, that the voters are electing Congress and other such institutions in the various states that rule the country. We call the United States a democracy because the rule of the country is in the hands of the voters. The voters determine everything. And this distinguishes the system, not only from the despotic systems of other countries, but also from the conditions as they prevailed in earlier days, in countries that already had parliamentary institutions and parliamentary government, at that time. However, there has developed, especially in the last decade, a problem of constitutional law, that is whether the government must get the approval of the people through Congress when it wants to spend, or whether the government, because it is established and has at its disposal a number of armed men, is free to spend as it wishes, simply by increasing the quantity of money. People must realize that the question is "Who should be supreme? The parliaments elected by the voters, who can restrict government spending by refusing to grant the power to tax? Or institutions that want to override the interests of the people by increasing the quantity of money to expand government spending and so do away with the prerogative and independence of the individual voter?" If we do not succeed in restoring the monetary system that makes the individual independent to some extent of the interference of government institutions, government banks, government monetary authorities, government price ceilings, and so on, we will lose all the achievements of the free market and of the free initiative of the individuals, whatever methods of constitutional law we follow. If the government can inflate whenever it wants to spend, it can take away from the people without their agreement everything, their purchasing power, their savings, and so on. From this point of view there disappears even the fundamental principle which everybody sees as the difference between a Communist government and a government based on the idea of individual freedom, the preservation of free markets and the ability of the people to control the government.

If you look at the constitutional history of England in the 17th century, you learn that the Stuarts had problems with the British Parliament. The conflict consisted precisely in the fact that the Parliament was not prepared to give to the King of England the money he needed for purposes of which the Parliament didn't approve. The people disapproved of a great part of the government expenditures and Parliament was not anxious to impose taxes. The Stuart kings wanted to spend more than Parliament was prepared to give them. If the King at that time, in 1630 let us say, had asked one of those who are considered experts today in government finance, "What can I do? I don't have the money!" the "expert" would have said, "Unfortunately, your family, the Stuarts, came too early to their position as rulers. Two hundred years, three hundred years later, it would be much easier for such a government as you want to rule the country. A printing press would have been sufficient to make it possible for your government to spend all the money it needed to have an army and the other things needed to protect the King against the people." But the poor Stuarts were living in an age in which the technique of producing paper money had not been developed to a considerable extent. Charles I couldn't inflate, you know. There was no solution for him; he could not engage in deficit spending. This was the undoing of the Stuart family and the Stuart regime. And in the conflict which originated out of this, one member of the Stuart family lost his life in a very disagreeable way — Charles I lost his head. And the Stuart family as such lost the crown of England. What the poor Stuarts didn't have was the facility of the printing press as it exists today.

The monetary problem we have to struggle with today is the problem of paying for government expenditures which are not accepted or, let us say, not approved, by the people. The conduct of government affairs, public affairs, is not different from the conduct of the financial and monetary conduct of private affairs. If the government wants to spend, it has to collect the money; it must tax the people. If it doesn't tax, but increases the quantity of money in order to spend more, then it brings about an inflation. The difference between the conditions in 18th century England and the conditions in other countries, let us say for instance in Russia, consisted of the fact that the Russian government was free to take away from its subjects what it wanted while the British government was not. The British government had to comply with the provisions of a set of laws that limited the amount of money the government had the right to collect from its citizens. And it had to spend this money precisely according to the wishes of the people.

All our constitutional laws and our system of government are based upon the fact the government is not permitted to do anything that violates this system of laws representing the moral and actual ideas and philosophies of our people. But if the government is in a position to increase the quantity of money, all these provisions become absolutely meaningless and useless. If it is said that the government has to spend, is entitled to spend, a definite amount of money for keeping people in prisons, this means something. There is a definite reason for its spending. All our legal provisions are influenced to some extent by the fact that this is the amount of money which is given to the government for this purpose. But if the government is in a position to increase the quantity of money to use for its own purposes, then all these things become merely a theoretical expression of something which has practically no meaning at all. We must not forget that all the protection given to individuals through constitutions and laws disappears if the government is in a position to destroy the meaning of every interhuman relation by undermining the system of indirect exchange and money which is called the market. And this is much more important than any other problems we talk about today. It is the interference of the government with violence that has spoiled money, that has destroyed money in the past, and that is perhaps destroying it again today. Some years ago you could frequently read quotations saying that Lenin said that the best method to destroy the free enterprise system would be to destroy the monetary system. Now a professor in Germany has demonstrated that Lenin never said this. But if Lenin had said this, it would have been the only correct thing that he ever said. The monetary problem which we have in this country, which you have in every country today, is the same — to keep the budget in equilibrium, to balance income and outgo, revenue and expenditure without printing an additional quantity of banknotes, without increasing the quantity of the monetary units. This is not only a problem of economics. It is also the fundamental problem of constitutional government, you know. Constitutional government is based upon the fact that the government can only spend what it has collected in taxes. And it can only tax the people if the people accept it by the vote of their representatives in parliament. And in this way the voters are the sovereigns. The problem of monetary management in a modern country cannot, therefore, be separated from the constitutional problem, from the doctrine that says that all problems of government, all governmental matters are decided ultimately by the vote of the people. Whether you call this democracy or popular government doesn't make any difference. But there is no monetary or budgetary problem that can be separated from the constitutional problem of who rules the country, who determines ultimately what has to be done in the country.

Capitalism, the Rich and the Poor It is a very popular assumption, criticized only very rarely by people, that the capitalistic system brings about satisfactory conditions for a minority of profiteers, while the masses become more and more impoverished. Of all the enormous problems connected with the monetary crisis, I want to deal with this problem especially because the most popular, or one of the most popular, ideas of Marxism is that the system of capitalism brings about the progressive impoverishment, the progressive deterioration of the economic state of affairs of the masses, for the benefit of a shrinking number of people who become richer and richer from year to year. People believe that what is going on with these monetary problems today concern the well-to-do and that simple people are not so much interested. I want to show you how erroneous this idea is. It is thought that when the government inflates and as a result lowers the purchasing power of the monetary unit, this is of advantage to the masses, to the great majority of the people, and that only the rich are suffering. If you don't want to use the term "suffer," let us say have to pay higher prices for things. Now this idea, that the interested people are not the masses, not the majority of the people, but only the wealthy people and that it is only the wealthier and richer people that are concerned, is based on an ancient doctrine.

This doctrine was perfectly correct in the days of Solon (c.638-559 B.C.) of Athens, or in the days of ancient Rome, of the Gracchi brothers (d.121 and 133 B.C.), or in the Middle Ages. In the pre-capitalistic ages the rich people owned land and were, therefore, wealthy. They could save, increase their possessions by investing in real property, houses, businesses, landed property. Or they could increase their fortunes by dealing in a more conservative way with the forests which they owned. On the other hand there were people who were poor, very poor, people who had nothing, who might occasionally earn a small 