6. Inflation

CHAPTER

SIX

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 n 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.