Ludwig von Mises on Money and Inflation

CHAPTER

THIRTEEN

Many Economics Professors Believe the Quantity of Money Should be Increased

Many famous professors of economics think that the supply of money is insufficient. It’s unbelievable but we have now already for a long time, for many years, textbooks that say, in every new edition, that the quantity of money must increase by 2%, or 5%, or 7%. They change it from year to year—this is without any importance, what quantity they recommend is not so important—what is important is that they say that such an increase is good from the point of view of their policies. Wonderful! The government, the banks, can distribute more money, but they cannot distribute more goods. And this is the problem. As this additional money will raise the prices of goods, those who do not get any of this additional money are hurt. And this is what people don’t realize, what they don’t see. If this money is increased every year it means only that other groups can say “Why did we not get more?” And then the government gives them a quantity too and then again to others also. And this is the situation we have today. The question will always be: To whom do you give this additional quantity? Because if the additional quantity is given to somebody else, your conditions will be impaired.

I don’t say that the quantity of money should be increased, or that it should be decreased. It is nonsensical if people complain in their textbooks about the increase in wealth of some groups of the population and about the decrease in wealth of other groups of the population and then recommend policies which will bring about precisely those conditions they consider wrong. From the point of view of most people, of the masses, an increase in the money supply is bad.

However, these inflationary methods are very popular. They are popular because they are very comfortable for the government. They are also very comfortable from the point of view of the individual member of a parliamentary body. The member of Parliament is not made responsible for higher taxes, but he accepts with pleasure the responsibility for higher expenditures. Therefore, if you read those reports of the parliamentary bodies which are not reprinted in all newspapers, you will find that most members of Parliament, of any parliament—I am not talking about the parliaments of the countries represented in this room—are very quick to suggest additional expenditures and to suggest additional taxes of the kinds which the voters in their district do not pay. At the same time, they have some inhibitions with regard to what they consider as the unjust overburdening of their own voters with taxes.

I once heard a government official, the minister of finance of a country which was famous for its inflation and not for anything else, say, “My minister of education says he needs more money. I am the minister of finance. I have to provide the money. I have to print the money.” It doesn’t matter whether the purpose is a good one or a bad one. What it brings about is that there is now on the market an additional demand for commodities and services which was created out of nothing.

An increase in the quantity of many things is very good—yes, an increase in the supply of those things which are useful. But an increase in the supply of, let us say rats and mice, would not be very useful. Fortunately this is not a problem men have to decide because the interests of all people agree in this regard. But their interests do not agree with regard to money. What misleads the thinking of many people, and unfortunately also the thinking of those people who are operating our governmental and political activities, is the idea that the quantity of money counts. It is certainly better for the individual to have more money than less. But it is not better for the whole economic system to have more money than less. Money is a medium of exchange. And that means, first of all, that its quantity is without any importance for the perfection of its functions. If you increase the total quantity of money, the total quantity of the medium of exchange, you do not improve conditions generally; you only change exchange ratios between the individuals’ evaluations of goods and services and of the thing used as money. I want to make this clearer by pointing to a very simple case taken from daily affairs.

The most outspoken defender and preacher of inflation in our age, Lord Keynes, was right from his point of view when he attacked what is called “Say’s Law.” Now Say’s Law is one of the great achievements of the early days of economic theory. The Frenchman, Jean-Baptiste Say,1 in the so-called Say’s Law, said you can’t improve conditions by increasing the quantity of money generally; when business is not good, it is not because there isn’t enough money. What Say had in mind, what he said when he criticized the doctrine that there should be more money, was that everything that somebody produces is at the same time a demand for other things. If there are more shoes produced, these shoes are something that is offered on the market in exchange for other goods. Ultimately goods are not exchanged against money—money is only a medium of exchange—goods are exchanged against other commodities. And if you increase the quantity of money you do not improve anybody’s situation except the definite man to whom you give it; this man can then buy more, can then withdraw more things from the market.

When people asked a grocer, “Why is your business not better? Why don’t you make more money?” he answered: “People don’t have enough money and, therefore, my business is not satisfactory.” What he meant was not that all people didn’t have enough money but that his customers didn’t have enough money. He said, “My customers unfortunately have not enough money and, therefore, they can’t buy more from me.” If the grocer wanted to earn more, and if his customers, all taken together, were not rich enough to give him more business, it would have been necessary for him to find more customers. But this grocer did not mean that more money in general was needed. He does not say he is interested in the whole world, in everybody’s money. What this grocer has in mind is more money to his customers. This is “the grocer philosophy.”

Now the governments believe, perhaps they are innocent in this as this belief is relayed to them by “bad” professors, that there is something which ought to be done. Really everybody agrees that there should be more money for this or that purpose—whether it is for schools or hospitals or scientific research or whatever doesn’t make any difference. Let us say the government says that the government employees have very small salaries; they should get higher salaries. As the government itself does not produce anything, the only successful method for the government to follow is to tax the people and use the revenue collected by taxes for increasing the salaries of certain government employees. There is no possibility for the government to improve the conditions of government employees in any other way than by taking money away from the rest of the population and, therefore, impairing their conditions. If the government taxes, takes away something from the taxpayers, then they are forced to restrict their expenditures but there is no reason for general price changes. Those people to whom the government gives the higher salaries are in a position to buy what the other people used to buy and can no longer buy because they had to pay the taxes. Changes would result from the fact that some things which taxpayer Mr. A used to buy are now bought no longer by Mr. A but by government employee Mr. B. This would tend to increase some prices of the things Mr. B buys and to reduce the prices asked for the things Mr. A can no longer buy. But no revolutionary change takes place in the general height of prices. This is what goes on continually in a country the government of which has a balanced budget. But there is another way, another method. And the government uses this other method.

The government prints the additional money. As you know it is very easy for the government to print money. And if the government prints this money, what is the effect? The effect is that those to whom the government gives this new money, in this instance government employees, are now in a position to buy more. Nothing has changed in the world; everything is as it was yesterday; there are no more goods available; but there is more money today because the government made it and gave it to certain government employees, let us say armaments workers. It may be for the best possible purpose. We do not discuss the items in the government budget, but only the total amount. And now the government gives money to some people, and these people appear on the markets with an additional demand, with a demand that didn’t exist yesterday. Lord Keynes was enthusiastic about this demand, you know; he thought it was wonderful; yes, it is true. He called this increasing demand bringing about “effective demand.” Of course, this is a very correct description. But the thing is that prices are going up. But what does it mean?

Let us take potatoes as the example. There are no more potatoes on the market. But there is more money in the hands of the people who want to eat potatoes. While yesterday it was enough for a man to spend one dollar to buy potatoes for his need, today he needs more. He needs today, let us say, two dollars, only because there is more money, not because anything else has changed. If he were only to offer one dollar, then the man who got the additional money from the government would say, “Ho, ho! I will pay $1.10 and I will get the potatoes and you can go home empty-handed.” And this is the thing we all are experiencing today—price increases due to inflation.

The government increases the quantity of money. All the evils under which we are suffering in our market conditions everyday are due to the fact that governments believe that it is permissible and natural to produce money to increase the power of the government to spend. In order to spend more, the governments have to do practically nothing but give an order to a printing office: “Print a quantity of money and give it to us.” If private citizens do this, the government doesn’t like it. There are many printing offices in the country; most of these printing offices are in the position to print dollar bills. What prevents the individual citizen from printing dollar bills, banknotes, is a series of laws which make this a crime, and the government is powerful enough to prevent it by arresting the people and imprisoning them, and so on. But if the government itself prints additional dollars, then it is legal and it increases the quantity of money. And this is the monetary problem. Apart from the fact that this brings about a very bad situation for those people who were not receivers of the new additional money, because they have not received more money, they now face higher prices.

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2Jean-Baptiste Say (1767–1832)

• 1Speaking on another occasion (April 30, 1953 at his NYU seminar), Mises was not so discreet; there he identified the country whose bonds he was discussing as Sweden. —BBG
• 2Legal 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.