I assume that you understand how the banking system established and how the banks could enhance the services rendered by gold, by transferring properties from one individual to another individual in the books of the banks. When you study the advancement of the history of money you will discover that there were nations in which there were systems in which all the payments were made by deals in the books of a bank, or of several banks. The individuals got an account by paying gold into this bank. There is a restricted amount of gold, so the payments which are made are restricted. And it was possible to transfer gold from the account of one guy to the account of another.
However then the federal governments started something which I can only describe in basic words. The federal governments started to provide paper, which they wanted to serve the function, perform the service, of cash. When individuals purchased something they expected to receive from their bank a particular quantity of gold to pay for it. However the federal government asked, What’s the distinction whether the people actually get gold or whether they get a title from the bank that provides the right to request for gold?It will be all the same to them.
So the government released paper notes, or offered the bank the opportunity to provide paper notes, which offered the receiver the right to ask for gold.This led to an increase in the number of paper banknotes that provided to the bearer the right to request gold.
Not too long ago, our federal government proclaimed a new method for making everybody thriving: a method called “deficit funding.” Now that is a terrific word. You know, technical terms have the bad routine of not being understood by individuals.
The government and the journalists who were writing for the government told us about this “deficit spending.” It was fantastic! It was considered something that would improve conditions in the entire nation. However if you equate this into more common language, the language of the uneducated, then you would state “printed money.” The government states this is just due to your illiteracy; if you had an education you would not say “printed money;” you would call it “deficit funding” or “budget deficit.”
Now what does this suggest? Deficits! This indicates that the federal government invests more than it gathers in taxes and in borrowing from individuals; it means government spending for all those functions for which the federal government wants to invest. This indicates inflation, pressing more cash into the market; it doesn’t matter for what purpose. And that implies reducing the acquiring power of each financial system. Instead of collecting the money that the federal government wanted to spend, the government fabricated the cash. Printing money is the easiest thing. Every federal government is clever enough to do it.
If the government wishes to pay out more money than in the past, if it wants to buy more commodities for some purpose or to raise the salaries of government employees, no other way is open to it under typical conditions than to collect more taxes and utilize this increased earnings to pay, for example, for the higher wages of its employees. The fact that individuals need to pay higher taxes so that the federal government may pay higher wages to its staff members means that private taxpayers are forced to restrict their expenditures.
This restriction of purchases on the part of the taxpayers neutralizes the expansion of purchases by those receiving the money gathered by the federal government. Therefore, this simple contraction of spending on the part of some, the taxpayers from whom money is taken to provide to others, does not produce a basic modification in prices.
The thing is that the person can refrain from doing anything that makes the inflationary maker and system work. This is done by the government. The government makes the inflation. And if the government grumbles about the truth that rates are increasing and designates committees of learned males to fight against the inflation, we have just to state, “No one besides you, the government, produces inflation, you know.”
On the other hand, if the government does not raise taxes, does not increase its regular incomes, but prints an extra amount of money and distributes it to government employees, extra buyers appear on the marketplace. The variety of buyers is increased as an outcome, while the amount of products offered for sale remains the same. Rates necessarily increase, because there are more individuals with more money requesting for commodities which had actually not increased in supply.
The federal government does not speak of the boost in the amount of money as “inflation;” it calls the truth that product rates are going up “inflation.” The federal government then asks who is responsible for this “inflation,” that is, for the greater rates? The answer– “bad” people; they may not know why rates are going up but nonetheless they are sinning by requesting for higher costs.
The best proof that inflation, the boost in the amount of cash, is extremely bad is the reality that those who are making the inflation are rejecting again and again, with the greatest eagerness, that they are responsible. “Inflation?” they ask. “Oh! This is what you are doing since you are asking greater costs. We don’t know why costs are going up. There are bad people who are making the prices go up. However not the federal government!”
And the government says: “Higher costs? Look, these individuals, this corporation, this bad male, the president of this corporation …” Even if the federal government blames the unions– I don’t wish to discuss the unions– but even then we need to realize what the unions can not do is to increase the quantity of cash. And, therefore, all the activities of the unions are within the framework that is constructed by the government in affecting the amount of cash.
The circumstance, the political scenario, the discussion of the issue of inflation, would be very various if individuals who are making the inflation, the government, were freely stating, “Yes, we do it. We are making the inflation. Regrettably we have to invest more than people are prepared to pay in taxes.” However they do not state this. They do not even state openly to everyone, “We have increased the quantity of cash. We are increasing the quantity of money since we are spending more, more than you are paying us.” And this leads us to an issue which is simply political:
Those into whose pockets the extra money goes first make money from the situation, whereas others are obliged to limit their expenses. The federal government does not acknowledge this; it does not state, “We have increased the quantity of cash and, for that reason, prices are increasing.” The federal government begins by stating, “Costs are going up. Why? Due to the fact that people are bad. It is the responsibility of the government to avoid bad individuals from bringing about this upward motion of rates, this inflation. Who can do this? The federal government!”
Then the government says, “We will avoid profiteering, and all these things. These individuals, the profiteers, are the ones who are making inflation; they are asking higher costs.” And the government elaborates “guidelines” for those who do not wish to be in the incorrect with the government. Then, it includes that this is because of “inflationary pressures.” They have invented many other terms also which I can not keep in mind, such ridiculous terms, to describe this scenario– “cost-push inflation,” “inflationary pressures,” and so forth. Nobody understands what an “inflationary pressure” is; it has actually never ever been specified. What is clear is what inflation is.
Inflation is a considerable addition to the quantity of cash in circulation … And this system can work for a long time, however only if there is some power that limits the government’s wish to expand the amount of money and is effective enough to be successful to some level in this regard. The evils which the federal government, its helpers, its committees, and so on, acknowledge are connected with this inflation, however not in the method which they are discussed.
This shows that the intention of the governments … is to conceal the real reason for what is occurring. If we wish to have a cash that is appropriate on the market as the legal tender, it must be something that can not be increased with an earnings by anybody, whether federal government or a citizen. The worst failures of money, the worst things done to money, were refrained from doing by lawbreakers however by federal governments, which really typically should be considered, by and large, as know nothings however not as criminals.
Excerpted from Ludwig von Mises on Cash and Inflation: A Synthesis of A Number Of Lectures, put together by Bettina Bien Greaves. This lecture was given at the Structure for Economic Education (FEE).