In this great video by Libertarian Europe, Ludwig von Mises explains what inflation truly is, how it's historically defined, and how the semantic revolution altered the meaning of the word inflation to prevent us from fixing the problem.

Transcript:

hi my name is ludwig von mises and today i will explain what inflation is in the 16th century when the gold and silver reserves of america were exploited by colonists huge amounts of these precious metals were carried to europe since currencies of the time were minted out of these precious metals there was a general tendency for prices to rise in the same way nowadays when a government increases the amount of money in the economy all money loses purchasing power and consequently prices tend to rise this phenomenon that i've just described
is known as inflation unfortunately some people prefer to see inflation not as an increase in the quantity of money but as a rise in prices though that is only one of inflation's effects this semantic revolution is one of the main features of our day it tries to change the meaning of inflation making many people call inflation not the large increase in the money supply but one of its consequences the general trend of prices rising this semantic revolution is far from harmless it plays an important role in fostering popular trends favoring
inflationism with this revolution there is no longer a term to designate what the word inflation means it is then difficult to fight a policy that has no name statesmen and writers are no longer able to use a term that the general public understands and relates to the problem of issuing large additional amounts of currency another drawback is that many inflationists say they fight inflation when in fact they promote it you see if inflation is the rise in prices a layman can be convinced that the fault is with greed and opportunism
that of businessmen who want ever greater profits but if inflation is the massive expansion of the money supply then the blame lies with governments and their respective central banks for abusing their monopoly over currency it is not uncommon to see politicians and even economists arguing that there is no relationship between monetary expansion and the general increase in prices now under current technological conditions nothing would be easier than making scraps of paper and printing some monetary figures on them
in the united states for example where all bills are of the same size printing a one thousand dollar bill would cost the government no more than printing a one dollar bill well let's travel back in time and go back to the 18th century when the first attempts were made to issue bank notes and assign them the status of currency many governments believe that bankers had some magic formula that allowed them to create wealth out of thin air a few years before the french revolution when france was in financial trouble the
king sought out one of these ingenious bankers and appointed him to an important position and so monsieur necker famous madame de stahl's father became france's finance minister and everyone expected him to solve the country's financial problems at the time neca decided to send money to the colonists of america to help them in the war of independence against england but he did so without raising taxes seen from today that was certainly the wrong way to try to solve problems what i want to demonstrate is that there is no magic formula
if the government needs money it has to obtain it by imposing taxes on its citizens or by borrowing money but most governments think that there is another magical method of obtaining the necessary money which is simply to print it if the government wants to do something beneficial build a hospital for example the government's means for raising the required money is to collect taxes from the citizens and build the hospital with the amount thus acquired in that case there will be no increase in prices because when the government
raises money for the construction of the hospital the citizens burdened by this tax are forced to reduce their spending and in that case the amount of money in circulation is not increased of course the government won't buy exactly the same goods that the citizens would buy but the point is that on average there is no rise in prices as a result of the construction of the hospital by the government i chose the example of a hospital precisely because it is so common to hear that inflation is only bad when it is used for bad ends so let's assume
that the government always uses the new money it is issued for the best possible purposes it turns out that the issue is not how the money is spent it is how it is obtained by the government for example the government could use the money raised through taxes to hire new employees or to raise the salaries of those already in its service these employees having had an increase in their salaries are then able to buy more when the government collects taxes from citizens and applies this sum to increase the salaries of its staff
taxpayers will have less to spend but public servants will have more in this case the trend for prices to rise will not occur but if the government prefers to substantially expand the money supply that is printing a lot of new money or simply typing numbers in the bank accounts of people through easy and cheap credit as it happens nowadays with the advent of technology then some people will start to have more money while everyone else still has as much as before thus those who receive the newly printed money will compete with those who are
previously buyers and since there are no more goods than before but there are more units of money in the market and since there are people who can buy more now than yesterday there will be an additional demand for an unchanged quantity of goods therefore prices will tend to rise but it is important to point out that the upward trend in prices will be established step by step since it is not the famous price level when we speak of price level the image that people form in their minds is that of a liquid that rises or falls
according to the increase or decrease in its quantity but which like a liquid in a reservoir always rises evenly but with prices there is no such thing as evenly as an effect that became known as the cantion effect explains prices do not change to the same extent much less immediately after monetary expansion there are always prices that change faster fall or rise faster than others and there's a reason for that people do not all precisely buy the same goods in the same quantities on the same day the extra money that the government
printed and spent is not used to purchase all goods and services evenly it is used in the purchase of certain commodities the prices of which will rise while others will still remain at the prices held before the new money was introduced into the market so when inflation starts different groups of the population get affected in different ways the groups who first receive the new money gain an advantage over those that receive the new money last when prices have gone higher let's illustrate this with an example
suppose the government issues substantial amounts of money to pay for a war and with that new currency it buys ammunition the first to receive the additional money then are the ammunition industries and those who work for them they end up earning higher profits and earning higher wages because their businesses flourish why is that because they were the first to receive the additional money and now having more money in their hands they can buy more and they buy from other people who manufacture and sell the goods they
demand these other people constitute a second group benefiting from the new money now received and this second group too considers inflation to be very beneficial for their business why not isn't it splendid to sell more and the owner of a restaurant located in the surroundings of a munitions factory for example says it's really wonderful ammunition workers have more money they are coming to my establishment like never before they're all supporting my restaurant this makes me very happy the situation is as follows
those groups to whom money arrives first have their purchasing power increased and can continue to buy many goods and services at prices that match with the previous state of the market at the situation prevailing on the eve of inflation but there are other groups of the population for whom this money arrives much later these people find themselves in an unfavorable situation before they have access to the additional money prices have already risen and they are obliged to pay higher prices than previously for some
commodities they wish to acquire or practically all of them while their earnings remain the same or do not increase proportionally to the prices at each moment therefore those groups directly affected by inflation are all different for some of them inflation is not that bad and they even defend its extension here comes the resulting issue governments tend to prefer inflation to increasing taxes increasing taxes is an extremely unpopular measure we have had revolutions that started due to an increase in taxes on the other hand inflation more hidden
is not that unpopular yet of course most politicians are not going to say i will adopt inflation as a method the technical procedures used to produce inflation are very complex which makes the common citizen with too little time to delve into the topic not realize that inflation has started it is not easy to simplify such complex topics and i certainly wouldn't have written huge works on this topic if they're as simple as they seem to be but fundamentals are precisely these if the amount of money in circulation
increases while other things remain the same the value of money falls well let's go back in time again and look at one of the biggest inflations of all history the one that took place in the german reich after the first world war and that reached its peak in the post-war period the government as expected did not announce anything it simply made the central bank print more money ultimately great inflation ends with the collapse of the currency giving rise to a catastrophe a situation like that which occurred in germany in 1923.
on the 1st of august 1914 one dollar was at par with four marks and 20 fennigs nine years and three months later in november 1923 one dollar was quoted at a staggering 4.2 trillion marks in other words the mark was no longer worth anything some say at the end of the day we're all dead i'm sorry to confirm that they are correct but the question is how long will the present moment last in the 18th century there was a famous lady madame de pompadour to whom the following saying is assigned aprenu le deluge after us the flood
madame de pompadour died shortly afterwards but her successor madame dubari survived a little longer only enough to be beheaded for many the long run soon becomes the present and the more inflation advances the more the long run is faced as unanticipated let us return to the case of germany which the whole world witnessed many books have described the events of that period and i have seen with my own eyes a similar situation in my country austria for many years the german people believed that their inflation was
nothing more than a temporary situation which would soon end as the inflation continued however the population thought it wiser to buy everything that was for sale anything instead of keeping the money in their pockets furthermore people reasoned that it was not convenient to lend money to be a creditor on the other hand it was excellent business to borrow money to be in debt debt would buy you anything in those times thus inflation continued to feed on itself inflation continued in germany until the autumn of 1923
at that time the country's factories paid their workers every morning one day in advance and the worker who was accompanied by his wife to the factory immediately gave her his earnings of the day all the millions he had just received she would then promptly go to a store to buy anything she saw what most people knew at the time the mark lost overnight an incredible 50 percent of its purchasing power money melted in people's pockets like a chocolate bar over a hot oven this final phase of german inflation did not last long
after a few days the whole nightmare was over the mark had lost all value and a new currency had to be established we must remember that in the end we may all be dead in fact there is no doubt that we will all be dead but we should take care of our earthly affairs during this brief interval in which we are allowed to live the best we can and one of the measures necessary for this purpose is to abandon inflationary policies you