14. Two Monetary Problems

CHAPTER

FOURTEEN

Two Monetary Problems

The function of the government is to prevent violence. The function which the government adopted, accepted, and held with respect to money, was to say what the parties had meant and whether or not the parties to the agreement had done what they were bound to do according to the agreement which they had voluntarily accepted. In these agreements the term “money” was used in order to specify the medium of exchange used by the parties when they met, when they made the contract. But when the government faced this situation they adopted the privilege of coining the metal used in these agreements and using the coins, at first without any bad intentions. At the beginning this didn’t mean anything more than the government’s declaration that the coin was a piece of metal of a definite weight and that it could be used as such by the parties. But again and again in various nations, governments misused the position which this situation gave them. The situation was simply this. Already in very ancient times, in the history of almost every group of nations and of every civilization there developed among governments that did this, that coined certain pieces of metal, the idea that they had the right to—it is very difficult for me to say this word—“swindle.” If one talks about all these things, one must not forget that they did it with a bad conscience. But when government got involved with money it led to two problems.

The first problem, the one which is not recognized as a monetary problem by the government, by official spokesmen and writers, is that of the increase in prices, the so-called “inflation.” One of the most important features of the “New Economics,”¹ once simply known as “bad economics,” is the change in the meaning of terms. Not so long ago, “inflation” meant a considerable increase in the quantity of money and money substitutes in circulation. The effect of such an increase was always a general tendency for prices to move upward. Everybody knew this and admitted it and certainly the government knew it too. Today the terminology, the official terminology, has been changed. We have to realize that the term “inflation” is used today in popular discussions of the subject in a way which is very different from the meaning attached to it in the past. People now call the increase in prices “inflation,” while in fact inflation is not the increase in prices but the increase in the quantity of money that brings about the increase in prices.

People nowadays don’t talk about the increase in the quantity of money; this is a subject that the representatives of our official doctrine do not wish to mention. They speak only of the fact that prices are moving upward. This, the effect, they call “inflation.” They do not mention at all the preceding fact, the cause of the upward movement, the increase in the quantity of money. They imply that government has nothing to do with it, that government wants only to keep prices stable. They simply assume that the upward movement of prices and wages, which they call “inflation,” is caused by the wickedness of people outside government, by “bad people” who are asking higher prices.

The second problem is the actual increase in the quantity of money itself. Let us talk about a fantastically small country, let us say Ruritania. Its government wants to raise money for some of its expenses. The government says, for instance, certain workers should get higher salaries. The total amount of government taxes is one million units of the monetary unit. Yes. But the government wants to spend two millions. The government adds to the million units it has taxed away from the citizens a second million which it has printed especially for this purpose. The result is that an increased quantity of money is exchanged on the market against a not-increased quantity of real goods, of consumers goods, and so on. And this means that prices must necessarily go up. The government has a group of learned men who try to conceal this very simple relation by using terms that sometimes mean nothing and sometimes mean precisely the opposite of what is really going on in the economic system.

To realize what this means we must first ask some questions: What are the necessary and unavoidable effects of an increase in the quantity of money? What is the effect of government’s spending more than it collects in taxes or borrows from the people by increasing the quantity of money? What is the effect on prices when those who receive some of this increased quantity of money spend it?

We shouldn’t be very strict in judging the governments which increase the quantity of money because they want to spend more than they collect from the people. The situation in Parliament, Congress, or the parliamentary body is that there is, on the one hand, a very unpopular tax, very unpopular, and on the other side there is a very popular expenditure. You know government expenditures are always popular with those people who receive the money the government spends. Now this is a fact, you know; you can’t change it. There is a very popular expenditure. And elections are not far away. Now what does the government do in such a situation, a weak government? Don’t say that if you were in control, you would have a better government; perhaps you would also be weak if you were in this situation. The government resorts to inflation, and that means an increase in the quantity of money. And this is the second monetary problem.

¹The doctrine derived primarily from the teachings of the British John Maynard Keynes that inflation through government spending was the solution for any economic downturn. —BBG