43. On Current Monetary Problems

An interview by Professor Percy L. Greaves, Jr., reprinted from the minibook published in 1969 by Constitutional Alliance, Inc.

Professor Greaves: What is the most important political problem for the world today?

Professor Mises: The prevention of a third world war which might doom our entire civilization.

Greaves: What is the most important problem from the viewpoint of domestic economic policies?

Mises: The re-establishment of financial integrity and making an end to inflation.

Greaves: What do you mean by the term “inflation”?

Mises: Inflation is a policy of increasing the quantity of money in order to make it possible for the government to spend more than it collects in taxes or borrows from the public. It is first of all a way to avoid the necessity of explaining to the people why higher taxes are necessary. The government wants to spend more than the duly elected representatives of the nation are ready to permit it to collect in taxes. Out of nothing, the government creates money by fiat, and then spends it. The government’s action does not add anything to the available supply of useful goods and services. It merely provides more money and thus brings about a tendency to make prices soar. Those groups of the population to whom the government gives some of this increased quantity of money are now in a position to buy more than they used to buy before. Their appearance on the market leaves a smaller share of the previously available commodities for those persons to whom the government did not give any of the increased money. Faced with higher prices, these people with no additional money are forced to restrict their purchases. Thus every inflationary action on the part of the government?and no other group or institution is able to resort to inflationary measures?results in a boon for some people and necessarily a disaster for the rest of the nation.

There cannot be justice in the distribution of the additional quantity of money that the government creates. It is impossible to deal out this additional quantity of new money in a way which will be acknowledged by all people as a “just” distribution. This is what economists have in mind when they refer to what they call the “non-neutrality of money.” The pseudo-economists are completely ignorant of this fundamental fact about government interference with the quantity of money. Thus many of them suggest that the government ought to increase the quantity of legal tender money year by year by a definite quantity?2% or 5% or 7%?they change it from year to year. They make these suggestions without realizing that such increases necessarily mean that one group of the population is helped while the rest of the population is hurt.

These advocates of annual increases in the quantity of money never mention the fact that for all those who do not get a share of the newly-created additional quantity of money, the government’s action means a drop in their purchasing power which forces them to restrict their consumption. It is ignorance of this fundamental fact that induces various authors of economic books and articles to suggest a yearly increase of money without realizing that such a measure necessarily brings about an undesirable impoverishment of a great part, even the majority, of the population.

Greaves: Whom does the inflation help? And whom does it hurt?

Mises: The various groups of the population are not affected in the same way by the inflation. There are some people whose economic standard the inflation improves.

Greaves: Who are they?

Mises: These are, this I mentioned already, the people to whom the government gives the newly-created quantities of money. Then there are the people who are profiting from the fact that those first receivers of the additional money are buying goods and services which they are selling. But those who are selling goods and services for which the demand doesn’t increase, or even drops, on account of the inflation, are losers. Still worse is the situation of those who are living on pensions and the income from savings.

Greaves: What is the effect of inflation on the savings of the masses?

Mises: This is a very important part of the problem. The servants of government say, “Who is against this increase in the quantity of money? The rich people. We are doing something very useful and necessary and beneficial for the masses. Why? Because if the quantity of money increases, the purchasing power of the dollar decreases. This means that the burden of debts becomes easier and thus the poor debtors are favored at the expense of the rich creditors.”

This was perfectly correct 2,500 years ago in Athens, when the great statesman Solon exacted economic reforms canceling public and private debts. Solon, had to deal with what we today call “social problems.” At that time the debtor was typically the poor man and the creditor was the rich man. The rich people could save and increase their possessions by investing in real property, houses, businesses, forests and other landed property. For the masses of the people things were different. Most of them couldn’t save at all, and those who could save a few pieces of money could only hide them in a dark corner of their premises, but this was all. They were not in a position to make savings grow by lending them against interest.

But we no longer live in Athens in the days of Solon. Nor do we live under the conditions of the Middle Ages or of the 16th, 17th, and 18th centuries, when the poor people couldn’t save. Under capitalistic conditions the situation is very different. Capitalism has enriched the masses, not all of them, of course, because capitalism still has to fight the hostility of the governments. But under capitalistic conditions it is no longer true that the creditors are the rich and the debtors the poor.

Capitalism has made it possible for the masses of the poorest strata of the population, the people who have less?I don’t want to say they are poor in the sense in which one frequently uses the term, only that they are poorer than the rich people?to save and invest their savings indirectly in the operation of business. They invest in savings deposits, insurance policies, and bonds. The rich people who are familiar with business conditions invest their savings in the common stock of corporations and in the purchase of real estate. But corporations and owners of real estate owe money, either because they have issued bonds, or because they have some connection with a bank which lends them money for the conduct of their affairs. The banks obtain this money from the savings accounts of simple citizens and the large insurance companies buy bonds with premiums paid by these poorer people.

The masses, people with less wealth than the richer people, have invested their savings “for a rainy day” in bonds, savings deposits, pension funds, and insurance policies. The value of all these investments depends on the value of the monetary unit. When the purchasing power of the monetary unit drops, their value shrinks. The masses, therefore, on account of having invested their savings in these assets, are creditors; the millionaires, the owners of real estate, common stocks, and so on, are debtors. Then if the government embarks on a policy of inflation, the fact that the debts are getting smaller does not hurt the rich so much, but the middle classes and the masses of people who have saved all their lives in order to enjoy a better old age, or to take care of themselves during periods of sickness, or to make it possible for them to educate their children, and so on. These poorer people are the big losers from inflation. This is what people do not realize when they are talking about various plans for increasing the quantity of money. The main victims of an inflationary policy are the less fortunate members of the population, while those who experience a boom are the owners of business enterprises and real estate who owe money to banks, insurance companies, or bond holders.

Greaves: What is the effect of inflation on charitable, educational, and other endowed institutions?

Mises: One of the effects of inflation is the financial destruction of all institutions and foundations based upon funds invested in bonds. One of the great evils that the fantastic inflations of world wars brought to the European countries was the almost complete disappearance of the funds of many humanistic, scientific, and charitable institutions. All European countries asked that the funds of such institutions be invested in bonds issued by the government or its subdivisions. The World War inflations wiped these funds out almost entirely.

For instance, an Austrian, who had been raised and educated in an Austrian orphan asylum, migrated to the United States. There, as a U.S. citizen, he acquired a considerable fortune. He died a short time before the outbreak of World War I, leaving about $2 million in U.S. funds for an orphan asylum in Austria. According to Austrian law, such funds had to be invested in domestic bonds while plans were made for new buildings. The construction had to wait, of course, until after the war. By that time, the inflation had entirely destroyed the purchasing power of this benefaction; nobody received any benefits from it at all.

Greaves: Could this happen again?

Mises: We may say that can’t happen here. But what we are now experiencing every day is that the savings of the majority of the American population invested in insurance policies, savings accounts, bonds, pension funds, and so on, are melting away.

Greaves: If the government stops inflating, must we have more unemployment?

Mises: The unemployment problem consists of the fact that people are asking for too much. It would be better not to talk about unemployment but about wage rates that are too high. Unemployment is the necessary effect of the fact that workers are not ready to work at wage rates which consumers are prepared to refund to the employer in buying the product. In the case of wages, people do not wish to admit what they admit with respect to everything else. They do not realize that persons who overrate their own skills and ask for higher wages than the customers are prepared to repay their employer must remain unemployed.

An employer cannot pay more to an employee than the equivalent of the value the employee, according to the judgment of the buying public, adds to the value of the product. If the employer were to pay more, he would suffer losses and finally go bankrupt. In paying wages, the employer acts, as it were, as an agent of the consumers. It is on the consumers that the incidence of the wage rates falls.

If nominal wage rates?wage rates expressed in terms of money?are too high for the state of the market, a part of the potential labor force will be unemployed. If the government then increases the quantity of money, that is, inflates, the unemployed can get jobs again. However, this happens only because, under the changed monetary conditions, prices are rising, or, in other words, the purchasing power of the monetary unit is dropping. The same amount of money wages then means less in real wages?that is, in terms of the goods and services that can be bought with the money wages. Inflation can cure unemployment only by reducing the potential wage earner’s real wage.

But then the unions ask for a new increase in wages in order to keep up with the rising cost of living and we are back where we were before, with large-scale unemployment. This is what has happened in this country in recent years, as well as in many other countries.

If you want higher wage rates, you have to accumulate more capital. The more capital?other things being equal?the higher wage rates climb in a free market, that is a market not manipulated by the government or the unions. At these market wage rates all who want to be employed can get jobs.

Now, as the majority of the consumers are precisely the same people who are working and earning wages, it is in fact the workers themselves who determine what wages are compatible with full employment. The idea that workers and consumers are different persons is erroneous. Ultimately the workers and the consumers are the same people. For instance, the railroad workers themselves are consumers who are consuming all those products which cannot be produced and brought to places of consumption without the cooperation of the railroads. If the railroad employees get an increase in wage rates, this means that the railroad employees, as consumers, will be among those who will also have to pay more for the services rendered by the railroads.

The faulty ideas which underlie all discussions concerning labor and wage rates is that the masses of wage earners are producing for an upper “class” of capitalists and do not themselves enjoy the fruits of their efforts. The truth is that by far the greater part of all that is produced by the wage earners is also consumed by them, the wage earners, who are members of the same “class.” The main characteristic of capitalism is precisely the fact that it is mass production for supplying the masses. What is not understood by the philosophy underlying union policies is that by far the greater part of all the goods and services produced under capitalism is consumed by the same people who are working in the shops, yards and factories.

Unemployment cannot be fought by inflation. Unemployment is always due to the fact that to employ a man at the wage rate he is asking for results in a loss for the employer. As long as the employment of an additional man is profitable, because there are buyers who are ready to refund to the employer what he has spent in hiring the worker, there is no unemployment.

There prevails on a free labor market a constant tendency toward full employment. In fact, the only reasonable and successful full employment policy is to let the free market determine the height of wage rates. If union pressure or government decrees raise wage rates above this free market height, unemployment of a part of the potential labor force necessarily develops.

Greaves: Then minimum wage laws do not raise workers’ wages?

Mises: People think that if they raise the minimum wage rates they will improve somebody’s conditions. This is one of the most dreadful mistakes, for there are people whose work, in the opinion of the buying public?i.e., the consumers?is not worth the higher wage rates. Therefore these people remain unemployed. Legally decreed minimum wage rates are either useless, or they create additional unemployment. If the consumers, in buying the product are not prepared to refund to the employer all that he has spent in producing the product, he will be forced to stop production and therefore the employment of workers.

Greaves: Many influential people say the cause of our monetary trouble is the unfavorable balance of payments. They imply that the higher prices due to the fall in the purchasing power of the dollar are a result of the fact that Americans are spending abroad more than foreigners are spending in the United States. They think that the balance of payments determines the purchasing power of the dollar in foreign trade and consequently in domestic prices, so they want to stop the American inflation by passing laws to reduce imports and to stop American citizens from traveling or spending money abroad. What do you have to say about that?

Mises: This interpretation of American monetary troubles is absolutely wrong The balance of payments argument is made in order to deny the government’s responsibility for inflation. It is an attempt to exonerate the government policy of increasing the quantity of money and to indict the American people for the tendency of prices to rise. From this point of view the government wants to restrict the importation of goods which they consider unnecessary and to prevent Americans from traveling abroad.

Now let us see what this means. When U. S. citizens buy some imported product, they must pay for it. When the government prevents them from buying this foreign product, let us say French champagne, they will not put these dollars into a package and send this package to the government so it will have more money to pay the deficits of its enterprises?the post office, for instance. The citizens will buy something else on the domestic market. The prices of the domestic products they purchase will then go up on account of the fact that there is now a greater demand for them. This will bring about higher prices for some things which were previously exported and these things will no longer be exported.

In addition, the fact that an American law makes it impossible or more expensive for Americans to buy certain foreign products that they used to buy will bring about a lowering of the demand for these foreign products. Consequently, in order to make it possible for the foreign producers to sell all their production, they will tend to drop the prices of these foreign products. As a result, the foreigners will no longer be in a position to buy as much, to maintain the same standard of living as they did before. They will have to restrict their consumption. They will, for instance, have to restrict the purchase of some imported commodities, let us say, American cars. Thus, it comes about that when a country restricts its imports, it necessarily also restricts its exports. When foreigners sell less on our markets, they then have less means to buy our products.

The truth is that exports and imports depend on one another and in this sense are balanced. If we restrict the quantity of U.S. funds in the hands of foreigners, by anti-import measures and anti-overseas travel measures, we are necessarily restricting the quantity of the means?the money?that these foreigners are able to spend on U.S. goods or visits to America.

If all the countries of the world, keeping consistently to this balance of payments theory, were to make imports impossible, they would thereby also make exports impossible. Then every country would remain economically isolated. Prices and living costs would go up, not only because the government increases the quantity of domestic money, but also because the consumers would no longer have access to products that could be produced abroad under more favorable conditions. The result of all these policies would be more and more restriction of international trade.

Foreign trade is not one-sided. It is always necessarily a mutual exchange of goods and services between various countries for the mutual advantage of their citizens. A restriction of foreign trade means a reduction in the standard of living of the citizens of the countries whose trade is restricted.

Greaves: Why does this “balance of payments” situation develop only between countries and not between different sections of one country? There are many states in the United States with populations larger than, or at least not much smaller than the populations of many independent European nations. Why don’t we hear the same complaints about the citizens of Illinois spending their money in Florida that we hear about the people who go to Paris and buy French perfumes, supposedly enriching France while impoverishing the United States?

Mises: Because the various American States have no independent monetary policies. There cannot be any inflation in Iowa that is not at the same time and to the same extent also an inflation in the 49 other states of the Union.

And you needn’t think only of trade among the states. People say it is harmful that France produces and sells to the United States only goods which are very bad, frivolous, immoral?books, novels, champagne, concerts, theatrical performances, and opera productions in Paris. But you could say the same thing also about, let us say, Brooklyn and Manhattan. Manhattan sells concerts, conferences, theatrical performances, opera productions, and so on, to the people from Brooklyn. Brooklyn people are spending their money in Manhattan. A Brooklyn man could say: “Why does my neighbor spend his money to attend an opera performance in Manhattan? Why does he not spend his money in Brooklyn?” And if you carry this reasoning step by step farther in the same direction, you would arrive eventually at perfect autarky, i.e., self-sufficiency, economic isolation of every group and political unit.

Greaves: What needs to be done?

Mises: What is needed in order to avoid all these unwelcome effects of inflation is to restore honesty in the conduct of monetary affairs. This means to restore integrity in the conduct of all governmental affairs also and especially in observing precisely the financial provisions of the Constitution.

Greaves: Which provisions do you mean?

Mises: Those financial provisions which make it illegal for the government to spend more than the budget permits. Every penny the government spends ought to be collected by the tax authorities, proceeding in strict conformity with the laws of the country.

Greaves: Then you wouldn’t permit the Federal Government to borrow?

Mises: If Congress wants to spend more it should make legal the issuance of additional quantities of government bonds-to be sold to the public, not to the commercial banks.

Greaves: It has long been illegal for Americans to own gold.1  Has this contributed to the problem?

Mises: The law that forbids the holding of gold to U. S. citizens makes it impossible for them to prevent the government’s attempts to inflate. If individual citizens had had the right to hoard gold, the lunacy of the attempts to substitute paper for gold would have become visible long ago.

Greaves: Then you don’t believe in “paper gold”?

Mises: There is gold and there is paper, but there is no such thing as “paper gold.” If private citizens in this country had the right to buy and to hold gold, a considerable quantity of gold would be owned today by U.S. citizens and it wouldn’t be difficult to restore the U.S. monetary standard, nor to restore the monetary standards of the whole Western civilization.

Greaves: Would increasing the “price of gold” help?

Mises: What is called, in rather mendacious terminology, “raising the price of gold” means in fact acknowledging legally the effects of inflation. The raising of the “price of gold” is in fact the acknowledgment by the government of the depreciation of the country’s legal currency system. An honest description of the case would not talk of raising the “price of gold” but of raising the price of all necessities, of all the things people need for daily consumption.

Greaves: Many people believe that money is necessarily a creation of the government. Is this so?

Mises: Money is a phenomenon of the market, a medium of exchange. But governments think of money as a product of government activity. Money is not a creation of the government. This should be repeated again and again. All these doctrines begin with the idea that there is something more in money than the agreement of the parties to exchange something against a definite kind and quantity of this money. It is government interference that has destroyed money in the past and it is government interference that is destroying money again.

Money, as such, is an institution of the market economy. It is one of the fundamental institutions of the market. A market without money is impossible. A market is precisely the freedom of the people to produce, to trade and to consume. When money is destroyed, when monetary exchange becomes impossible, then the existence of the market economy also comes to an end. And a free system without a market is impossible.

A thing cannot serve as money if the government has the right to increase its quantity ad libitum.

Greaves: Would it be more satisfactory if the government didn’t mint or print the money, but left that function to private institutions?

Mises: That assumes the manufacture of money by private institutions would be free from government interference. The trouble is not due to the fact that the government has the mint and the printing presses. Even if the governments had never tried to manufacture money, their influence would not have been different from what it is today.

The problem comes from the fact that it is the function of governments to adjudicate all disputes which might otherwise give rise to violence involving any of its citizens. The opportunity for governments to deal with monetary problems comes about in the same way in which they are concerned with all contracts providing for the exchange of goods and services. For example, governments are called upon every day to decide whether or not one of the parties to an exchange contract has failed to comply with his contractual obligations. A court’s finding of such a failure then justifies compulsion on the part of the governmental apparatus of violent oppression.

If both parties fulfill their contractual obligations instantly and simultaneously, no disputes are likely to arise which would induce either of the parties to appeal to the courts. However, if the obligations of one or both parties are deferred for a period of time, it may happen that the courts will be asked how the terms of the contract are to be enforced. If the payment of a sum of money is involved, this involves the task of determining what meaning is to be given to the monetary terms in the contract. Actually, the court is asked to define what must be legally accepted as money, The power to give certain pieces of paper legal tender quality is one that requires constant watching.

The transition from coins to paper made it easy to inflate. All the monetary troubles come from the fact that many governments, for financial purposes, abuse the power to determine that pieces of paper are the legal equivalent of the coins of the realm. The power that this abuse of the judicial supremacy of the laws and the courts confers on the governments is the sole source of all the monetary troubles. The private minting and printing of money would not eliminate this power.

Greaves: In your many writings on monetary problems you have always spoken highly of the gold standard. Why?

Mises: The practical problem of money today in the whole world is precisely this: Taxes are unpopular. And the most unpopular thing is to substitute a higher tax for a lower tax. The government wants to spend more without increasing taxes. Now what does the government do in such a situation? The government increases the quantity of money?it resorts to inflation. Prices necessarily go up as a greater quantity of money appears on the market and “chasing” after a not-increased quantity of goods.

The gold standard did not fail. The governments sabotaged it and still go on sabotaging it. The governments established a legal ratio between gold and the monetary unit. (For the United States the ratio established by law is that one ounce of gold is the legal equivalent of $35.)2  But then, by inflating, the government makes it impossible to maintain this legal tender ratio. This is the monetary problem. Governments do not want to admit that an increased quantity of paper money brings about higher prices, in terms of the government-issued paper money, for all commodities and, of course, also for gold.

The quantity of money is the decisive problem. The quality that makes gold fit for service as money is precisely the fact that the quantity of gold cannot be manipulated by governments. The gold standard has one quality, one virtue. It is that the quantity of gold cannot be increased in the way that paper notes can be increased. The usefulness of the gold standard consists in the fact that it makes the supply of money depend on the profitability of mining gold, and thus checks large-scale inflationary ventures on the part of governments.

Gold cannot be produced in a cheaper way by any governmental bureau, committee, institution, office, international agency, 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 as long as governments are committed to the idea that it is all right for a government, which has not collected enough money to pay its expenses by taxing its citizens or by borrowing on the market, to increase the quantity of money simply by printing it.

The eminence of the gold standard is to be seen in the fact that the gold standard alone makes the determination of the monetary unit’s purchasing power independent of the ambitions and activities of dictators, political parties and pressure groups. No government is powerful enough to destroy the gold standard as long as the market economy is not entirely suppressed. The gold standard alone is what the 19th-century champions of representative government, civil liberties, and prosperity for all meant by “sound money.”

• 1The right to own gold, denied to U.S. citizens in 1933, and still denied at the time of this interview (1969), was finally restored as of January 1, 1975.
• 2This artificially maintained ratio of $35.00 to one ounce of gold was raised in December 1971 to $38.00, and in February 1973 to $42.42. And then the ratio of the U.S. paper dollar to gold was allowed to float on the international market.