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How long can a central bank continue in inflation?

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Probably as long as people are convinced that the government,

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sooner or later but certainly not too late, will stop printing money and thereby stop

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decreasing the value of each unit of money. When people no longer believe this, when they

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realize that the government will go on and on without any intention of stopping, then they

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begin to understand that prices tomorrow will be higher than they are today. Then they begin

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buying at any price, causing prices to go up to such heights that the monetary system breaks down.

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Greetings and salutations, my fellow plebs. My name is Walker and this is the Bitcoin Podcast.

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The Bitcoin time chain is 843752 and the value of one Bitcoin is still one Bitcoin. Today's

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episode is Austrian Audible. I'll be reading the fourth of Mises' six lectures and the topic

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today is inflation. If this is your first time listening to the Bitcoin podcast and this Austrian

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Audible series, consider going back to the previous episodes on capitalism, socialism,

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and interventionism. And listening to those first, I believe these six lessons from Mises

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are best experienced in the order in which they were originally delivered. But of course, it's

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up to you. You can download the PDF of Economic Policy, Thoughts for Today and Tomorrow by Ludwig

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von Mises in the show notes. Today's lecture on inflation is really excellent and it's insane how

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all the misconceptions about inflation and the tendencies of politicians that Mises discusses

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in 1959 are still just as relevant today. I guess not enough people paid attention to the

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School of Austrian Economics at that time, but hopefully now more will start to please share

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these Austrian Audible lessons with your friends, family, and strangers on the internet who do not

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understand that the true cause of inflation is printing money out of thin air. It's literally

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what inflation means. These people can honestly benefit from the knowledge of real economics,

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as taught by Mises and the Austrian School. You can find the links to watch or listen to the show

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on all platforms by going to BitcoinPodcast.net and via the links in the show notes. If you're

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enjoying the Bitcoin podcast, do me a favor and give this show a five star rating because apparently

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that helps other people discover the show. And if you're listening on fountain.fm, which I personally

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recommend, consider giving this show a boost or creating a clip of something you found interesting.

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Finally, if you are a Bitcoin only company looking to sponsor the Bitcoin podcast,

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hit me up via social media or by going to BitcoinPodcast.net slash sponsor. Without further ado,

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let's get into lesson four from Mises six lessons. Inflation. Economic policy. Thoughts for today

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and tomorrow by Ludwig von Mises. Fourth lecture. Inflation. If the supply of caviar were as plentiful

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as the supply of potatoes, the price of caviar, that is the exchange ratio between caviar and money,

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or caviar and other commodities would change considerably. In that case, one could obtain

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caviar at a much smaller sacrifice than is required today. Likewise, if the quantity of money is

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increased, the purchasing power of the monetary unit decreases and the quantity of goods that can

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be obtained for one unit of this money decreases also when in the 16th century, American resources

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of gold and silver were discovered and exploited. Enormous quantities of the precious metals

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were transported to Europe. The result of this increase in the quantity of money was a general

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tendency toward an upward movement of prices in Europe in the same way today. When a government

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increases the quantity of paper money, the result is that the purchasing power of the monetary unit

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begins to drop. And so prices rise. This is called inflation. Unfortunately, in the United States,

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as well as in other countries, some people prefer to attribute the cause of inflation not to an

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increase in the quantity of money, but rather to the rise in prices. However, there has never been

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any serious argument against the economic interpretation of the relationship between

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prices and the quantity of money, or the exchange ratio between money and other goods, commodities,

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and services. Under present-day technological conditions, there is nothing easier than to

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manufacture pieces of paper upon which certain monetary amounts are printed. In the United States,

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where all the notes are of the same size, it does not cost the government more to print a bill of

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a thousand dollars than it does to print a bill of one dollar. It is purely a printing procedure

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that requires the same quantity of paper and ink. In the 18th century, when the first attempts were

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made to issue banknotes and to give these banknotes the quality of legal tender, that is, the right

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to be honored in exchange transactions in the same way that gold and silver pieces were honored,

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the governments and nations believed that bankers had some great secret knowledge,

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enabling them to produce wealth out of nothing. When the governments of the 18th century were in

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financial difficulties, they thought all they needed was a clever banker at the head of their

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financial management in order to get rid of all their difficulties. Some years before the French

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Revolution, when the royalty of France was in financial trouble, the king of France sought out

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a clever banker and appointed him to a high position. This man was, in every regard, the opposite of

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the people who, up to that time, had ruled France. First of all, he was not a Frenchman. He was a

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foreigner, a Swiss from Geneva, Jacques Necker. Secondly, he was not a member of the aristocracy.

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He was a simple commoner. And what counted even more in 18th century France, he was not a Catholic,

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but a Protestant. And so, Monsieur Necker, the father of the famous Madame d'Estelle, became

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the minister of finance, and everyone expected him to solve the financial problems of France.

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But in spite of the high degree of confidence Monsieur Necker enjoyed, the royal cash box

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remained empty. Necker's greatest mistake, having been his attempt to finance aid to the American

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colonists in their war of independence against England, without raising taxes. This was certainly

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the wrong way to go about solving France's financial troubles. There can be no secret way to the

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solution of the financial problems of a government. If it needs money, it has to obtain the money by

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taxing its citizens, or under special conditions, by borrowing it from people who have the money.

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But many governments, we can even say most governments, think there is another method for

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getting the needed money, simply to print it. If the government wants to do something beneficial,

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if, for example, it wants to build a hospital, the way to find the needed money for this project

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is to tax the citizens and build the hospital out of tax revenues. Then no special price revolution

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will occur, because when the government collects money for the construction of the hospital,

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the citizens, having paid the taxes, are forced to reduce their spending. The individual taxpayer

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is forced to restrict either his consumption, his investments, or his savings. The government,

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appearing on the market as a buyer, replaces the individual citizen. The citizen buys less,

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but the government buys more. The government, of course, does not always buy the same goods,

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which the citizens would have bought. But on average, there occurs no rise in prices,

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due to the government's construction of a hospital. I choose this example of a hospital,

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precisely because sometimes people say, it makes a difference whether the government uses its money

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for good or for bad purposes. I want to assume that the government always uses the money which it

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has printed for the best possible purposes, purposes with which we all agree, for it is not

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the way in which the money is spent. It is the way in which the government obtains this money,

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and brings about those consequences we call inflation, and which most people in the world

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today do not consider as beneficial. For example, without inflating, the government could use the

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tax collected money for hiring new employees, or for raising the salaries of those who are already

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in government service. Then, these people whose salaries have been increased are in a position

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to buy more. When the government taxes the citizens and uses this money to increase the

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salaries of government employees, the taxpayers have less to spend. But the government employees

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have more, prices in general will not increase. But if the government does not use tax money

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for this purpose, if it uses freshly printed money instead, it means that there will be people

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who now have more money, while all other people still have as much as they did before. So those

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who receive the newly printed money will be competing with those people who were buyers before.

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And since there are no more commodities than there were previously, but there is more money on the

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market, and since there are now people who can buy more today than they could have bought yesterday,

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there will be an additional demand for the same quantity of goods. Therefore, prices will tend

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to go up. This cannot be avoided, no matter what the use of this newly issued money will be. And

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more importantly, this tendency for prices to go up will develop step by step. It is not a general

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upward movement of what has been called the price level. The metaphorical expression, price level,

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must never be used. When people talk of a price level, they have in mind the image of a level

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of liquid, which goes up or down, according to the increase or decrease in its quantity,

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but which, like a liquid in a tank, always rises evenly. But with prices, there is no such thing

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as a level. Prices do not change to the same extent at the same time. There are always prices that

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are changing more rapidly, rising or falling more rapidly than other prices. There is a reason for

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this. Consider the case of a government employee who received the new money added to the money

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supply. People do not buy today precisely the same commodities and in the same quantities as they did

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yesterday. The additional money which the government has printed and introduced into the market is

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not used for the purchase of all commodities and services. It is used for the purchase of certain

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commodities, the prices of which will rise, while other commodities will still remain at the prices

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that prevailed before the new money was put on the market. Therefore, when inflation starts,

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different groups within the population are affected by this inflation in different ways.

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Those groups who get the new money first gain a temporary benefit. When the government inflates

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in order to wage a war, it has to buy munitions, and the first to get the additional money are the

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munitions industries and the workers within those industries. These groups are now in a very

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favorable position. They have higher profits and higher wages. Their business is moving. Why?

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Because they were the first to receive the additional money and having now more money at their

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disposal, they are buying and they are buying from other people who are manufacturing and selling

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the commodities that these munitions makers want. These other people form a second group and this

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second group considers inflation to be very good for business. Why not? Isn't it wonderful to sell

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more? For example, the owner of a restaurant in the neighborhood of a munitions factory says,

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it really is marvelous. The munitions workers have more money. There are many more of them now

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than there were before. They are all patronizing my restaurant. I am very happy about it. He does

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not see any reason to feel otherwise. The situation is this. Those people to whom the money comes

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first now have a higher income and they can still buy many commodities and services at prices

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which correspond to the previous state of the market to the condition that existed on the eve

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of inflation. Therefore, they are in a very favorable position and thus inflation continues

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step by step from one group of the population to another. And all those to whom the additional

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money comes at the early state of inflation are benefited because they are buying some things

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at prices still corresponding to the previous stage of the exchange ratio between money and

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commodities. But there are other groups in the population to whom the additional money comes

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much much later. These people are in an unfavorable position. Before the additional money comes to

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them, they are forced to pay higher prices than they paid before, for some or practically all,

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of the commodities they wanted to purchase, while their income has remained the same or has not

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increased proportionally with prices. Consider for instance a country like the United States during

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the Second World War. On the one hand inflation at that time favored the munitions workers,

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the munitions industries, the manufacturers of guns, while on the other hand it worked against

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other groups of the population. And the ones who suffered the greatest disadvantages from inflation

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were the teachers and the ministers. As you know a minister is a very modest person who serves God

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and must not talk too much about money. Teachers likewise are dedicated persons who are supposed

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to think more about educating the young than about their salaries. Consequently the teachers and

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ministers were among those who were most penalized by inflation for the various schools and churches

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were the last to realize that they must raise salaries. When the church elders and the school

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corporations finally discovered that after all one should also raise the salaries of those dedicated

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people, the earlier losses they had suffered still remained. For a long time they had to buy

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less than they did before to cut down their consumption of better and more expensive foods

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and to restrict their purchase of clothing because prices had already adjusted upward

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while their incomes, their salaries had not yet been raised. This situation has changed considerably

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today at least for teachers. There are therefore always different groups in the population being

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affected differently by inflation. For some of them inflation is not so bad. They even ask for a

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continuation of it because they are the first to profit from it. We will see in the next lecture

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how this unevenness in the consequences of inflation vitally affects the politics that

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lead toward inflation. Under these changes brought about by inflation we have groups who are favored

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and groups who are directly profiteering. I do not use the term profiteering as a reproach to

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these people for if there is someone to blame it is the government that has established the inflation

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and there are always people who favor inflation because they realize what is going on sooner

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than other people do. Their special profits are due to the fact that there will necessarily be

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unevenness in the process of inflation. The government may think that inflation as a method

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of raising funds is better than taxation which is always unpopular and difficult.

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In many rich and great nations legislators have often discussed for months and months

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the various forms of new taxes that were necessary because the parliament had decided to increase

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expenditures. Having discussed various methods of getting the money by taxation they finally

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decided that perhaps it was better to do it by inflation but of course the word inflation was

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not used. The politician in power who proceeds toward inflation does not announce I am proceeding

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toward inflation. The technical methods employed to achieve the inflation are so complicated that

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the average citizen does not realize inflation has begun. One of the biggest inflations in history

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was in the German Reich after the First World War. The inflation was not so momentous during the war

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it was the inflation after the war that brought about the catastrophe. The government did not say

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via proceeding toward inflation the government simply borrowed money very indirectly from

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the central bank. The government did not have to ask how the central bank would find and deliver

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the money. The central bank simply printed it. The great thing about bitcoin is that we know

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there will only ever be 21 million unlike the US dollar and literally every other fiat currency

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whose maximum supply is infinity. If you want to protect yourself from fiat monetary inflation

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you need to save in bitcoin and protect that bitcoin. So go to bitbox.swiss slash walker

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and use promo code walker for 5% off the fully open source bitcoin only bitbox o2 hardware wallet

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then get your bitcoin off the exchange and into your own custody. The bitbox o2 is honestly

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easy as hell to use whether you are brand new to bitcoin it's your first hardware wallet

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or you are a seasoned psychopath. It is bitcoin only and again it's fully open source you can

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head to their github and verify for yourself there is no need to trust me plus when you go to

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bitbox.swiss slash walker and use promo code walker not only do you get 5% off but you also

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help support this podcast so thank you. Today the techniques for inflation are complicated by the

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fact that there is checkbook money it involves another technique but the result is the same

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with the stroke of a pen the government creates fiat money thus increasing the quantity of money

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and credit the government simply issues the order and the fiat money is there the government does not

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care at first that some people will be losers it does not care that prices will go up the legislators

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say this is a wonderful system but this wonderful system has one fundamental weakness it cannot last

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if inflation could go on forever there would be no point in telling governments they should not

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inflate but the certain fact about inflation is that sooner or later it must come to an end

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it is a policy that cannot last in the long run inflation comes to an end with the breakdown of

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the currency it comes to a catastrophe to a situation like the one in Germany in 1923 on

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august 1st 1914 the value of the dollar was four marks and 20 phoenix nine years and three months

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later in november 1923 the dollar was pegged at 4.2 trillion marks in other words the mark was worth

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nothing it no longer had any value some years ago a famous author john manard keens wrote in the long

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run we are all dead this is certainly true i'm sorry to say but the question is how short or long

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will the short run be in the 18th century there was a famous lady madame du pompadour who is credited

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with the dictum après nous les deluges after us will come the flood madam du pompadour was happy

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enough to die in the short run but her successor in office madame du bali outlived the short run and

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was beheaded in the long run for many people the long run quickly becomes the short run and the longer

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inflation goes on the sooner the short run how long can the short run last how long can a central

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bank continue in inflation probably as long as people are convinced that the government sooner

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or later but certainly not too late will stop printing money and thereby stop decreasing the

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value of each unit of money when people no longer believe this when they realize that the government

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will go on and on without any intention of stopping then they begin to understand that prices tomorrow

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will be higher than they are today then they begin buying at any price causing prices to go up to

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such heights that the monetary system breaks down i referred to the case of germany which the whole

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world was watching many books have described the events of that time although i am not german but

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in austrian i saw everything from the inside in austria conditions were not very different from those

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in germany nor were they much different in many other european countries for several years the

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german people believed that their inflation was just a temporary affair that it would soon come

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to an end they believed it for almost nine years until the summer of 1923 then finally they began

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to doubt as the inflation continued people thought it wiser to buy anything available instead of

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keeping money in their pockets furthermore they reasoned that one should not give loans of money

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but on the contrary that it was a very good idea to be a debtor thus inflation continued feeding

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on itself and it went on in germany until exactly november 20th 1923 the masses had believed inflation

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money to be real money but then they found out that conditions had changed at the end of the

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german inflation in the fall of 1923 german factories paid their workers every morning in advance for

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the day and the working man who came to the factory with his wife handed his wages all the millions he

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got over to her immediately and the lady immediately went to a shop to buy something no matter what

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she realized what most people knew at the time that overnight from one day to another the mark

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lost 50 percent of its purchasing power money like chocolate in a hot oven was melting in the pockets

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of the people this last phase of german inflation did not last long after a few days the whole

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nightmare was over the mark was valueless and a new currency had to be established lord kienz the

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same man who said that in the long run we are all dead was one of a long line of inflationist authors

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of the 20th century they all wrote against the gold standard when kienz attacked the gold standard

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he called it a barbarous relic and most people today consider it ridiculous to speak of a return

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to the gold standard in the united states for instance you are considered to be more or less

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of a dreamer if you say sooner or later the united states will have to return to the gold standard

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yet the gold standard has one tremendous virtue the quantity of money under the gold standard

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is independent of the policies of governments and political parties this is its advantage

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it is a form of protection against spend-thrift governments if under the gold standard a government

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is asked to spend money for something new the minister of finance can say and where do i get the

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money tell me first how it will find the money for this additional expenditure under an inflationary

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system nothing is simpler for the politicians to do than to order the government printing office to

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provide as much money as they need for their projects under a gold standard sound government

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has a much better chance its leaders can say to the people and to the politicians we can't do it

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unless we increase taxes but under inflationary conditions people acquire the habit of looking

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upon the government as an institution with limitless means at its disposal the state the government

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can do anything if for instance the nation wants a new highway system the government is expected

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to build it but where will the government get the money one could say that in the united states

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today and even in the past under mckinley the republican party was more or less in favor of

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sound money and of the gold standard and the democratic party was in favor of inflation of

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course not a paper inflation but a silver inflation it was however a democratic president of the

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united states president cleveland who at the end of the 1880s vetoed a decision of congress to give

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a small sum about ten thousand dollars to help a community that had suffered some disaster and

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president cleveland justified his veto by writing while it is the duty of the citizens to support

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the government it is not the duty of the government to support the citizens this is something which

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every statesman should write on the wall of his office to show to the people who come asking for

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money i am rather embarrassed by the necessity to simplify these problems there are so many

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complex problems in the monetary system and i would not have written volumes about them

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if they were as simple as i am describing them here but the fundamentals are precisely these

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if you increase the quantity of money you bring about the lowering of the purchasing power of

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the monetary unit this is what people whose private affairs are unfavorably affected do not like

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people who do not benefit from inflation are the ones who complain if inflation is bad and if

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people realize it why has it become almost a way of life in all countries even some of the richest

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countries suffer from this disease the united states today is certainly the richest country in the

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world with the highest standard of living but when you travel in the united states you will discover

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there is constant talk about inflation and about the necessity to stop it but they only talk they do

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not act to give you some facts after the first world war great britain returned to the pre-war

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gold parity of the pound that is it revalued the pound upward this increased the purchasing power

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of every worker's wages in an unhampered market the nominal money wage would have fallen to compensate

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for this and the worker's real wage would not have suffered we do not have time here to discuss

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the reasons for this but the unions in great britain were unwilling to accept an adjustment

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of money wage rates downward as the purchasing power of the monetary unit rose therefore real

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wages were raised considerably by this monetary measure this was a serious catastrophe for england

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because great britain is a predominantly industrial country that has to import its raw materials

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have finished goods and food stuffs in order to live and has to export manufactured goods

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to pay for these imports with the rise in the international value of the pound the price of

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british goods rose on foreign markets and sales and exports declined great britain had in effect

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priced itself out of the world market the unions could not be defeated you know the power of a

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union today it has the right practically the privilege to resort to violence and a union

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order is therefore let us say not less important than a government decree the government decree

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is an order for the enforcement of which the enforcement apparatus of the government the

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police is ready you must obey the government decree otherwise you will have difficulties with the

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police unfortunately we have now in almost all countries all over the world a second power

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that is in a position to exercise force the labor unions the labor unions determine wages and then

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strike to enforce them in the same way in which the government might decree a minimum wage rate

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i will not discuss the union question now i shall deal with it later i only want to establish

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that it is the union policy to raise wage rates above the level they would have been on an unhampered

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market as a result a considerable part of the potential labor force can be employed only by

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people or industries that are prepared to suffer losses and since businesses are not able to keep

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on suffering losses they close their doors and people become unemployed the setting of wage

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rates above the level they would have on the unhampered market always results in the unemployment

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of a considerable part of the potential labor force in great britain the result of high wage

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rates enforced by the labor unions was lasting unemployment prolonged year after year millions

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of workers were unemployed production figures dropped even experts were perplexed in this

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situation the british government made a move which it considered an indispensable emergency

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measure it devalued its currency the result was that the purchasing power of the money wages upon

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which the unions had insisted was no longer the same the real wages the commodity wages were

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reduced now the worker could not buy as much as he had been able to buy before even though the

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nominal wage rates remained the same in this way it was thought real wage rates would return to the

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free market levels and unemployment would disappear this measure devaluation was adopted by various

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other countries by france the netherlands and belgium one country even resorted twice to this

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measure within a period of one year and a half that country was Czechoslovakia it was a surreptitious

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method let us say to thwart the power of the unions you could not call it a real success however

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after a few years the people the workers even the unions began to understand what was going on

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they came to realize that currency devaluation had reduced their real wages the unions had the

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power to oppose this in many countries they inserted a clause into wage contracts providing

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that money wages must go up automatically with an increase in prices this is called indexing the

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unions became index conscious so this method of reducing unemployment that the government of Great

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Britain started in 1931 which was later adopted by almost all important governments this method of

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solving unemployment no longer works today in 1936 in his general theory of employment interest

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and money lord keens unfortunately elevated this method the emergency measures of the period between

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1929 and 1933 to a principle to a fundamental system of policy and he justified it by saying in effect

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unemployment is bad if you want unemployment to disappear you must inflate the currency he realized

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very well that wage rates can be too high for the market that is too high to make it profitable

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for an employer to increase his workforce thus too high from the point of view of the total

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working population for with wage rates imposed by unions above the market only a part of those

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anxious to earn wages can obtain jobs and keens said in effect certainly mass unemployment prolonged

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year after year is a very unsatisfactory condition but instead of suggesting that wage rates could

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and should be adjusted to market conditions he said in effect if one devalues the currency

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and the workers are not clever enough to realize it they will not offer resistance against a drop

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in real wage rates as long as nominal wage rates remain the same in other words lord keens was

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saying that if a man gets the same amount of sterling today as he got before the currency was

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devalued he will not realize that he is in fact now getting less in old-fashioned language keens

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proposed cheating the workers instead of declaring openly that wage rates must be adjusted to the

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conditions of the market because if they are not a part of the labor force will inevitably remain

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unemployed he said in effect full employment can be reached only if you have inflation cheat the

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workers the most interesting fact however is that when his general theory was published it was no

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longer possible to cheat because people had already become index conscious but the goal of full

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employment remained what does full employment mean it has to do with the unhampered labor market

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which is not manipulated by the unions or by the government on this market wage rates for every

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type of labor tend to reach a point at which everybody who wants a job can get one and every

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employer can hire as many workers as he needs if there is an increase in the demand for labor

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the wage rate will tend to be greater and if fewer workers are needed the wage rate will tend to fall

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the only method by which a full employment situation can be brought about is by the maintenance of an

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unhampered labor market this is valid for every kind of labor and for every kind of commodity

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what does a businessman do when he wants to sell a commodity for five dollars a unit

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when he cannot sell it at that price the technical business expression in the united states is the

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inventory does not move but it must move he cannot retain things because he must buy something new

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fashions are changing so he sells at a lower price if he cannot sell the merchandise at five

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dollars he must sell it at four if he cannot sell it at four he must sell it at three there is no

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other choice as long as he stays in business he must suffer losses but these losses are due to

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the fact that his anticipation of the market for his product was wrong it is the same with thousands

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and thousands of young people who come every day from the agricultural districts into the city trying

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to earn money it happens so in every industrial nation in the united states they come to town with

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the idea that they should get say a hundred dollars a week this may be impossible so if a man cannot

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get a job for a hundred dollars a week he must try to get a job for ninety or eighty dollars and

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perhaps even less but if he were to say as the unions do one hundred dollars a week or nothing

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then he might have to remain unemployed many do not mind being unemployed because the government

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pays unemployment benefits out of special taxes levied on the employers which are sometimes nearly

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as high as the wages the man would receive if he were employed because a certain group of people

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believes that full employment can be attained only by inflation inflation is accepted in the

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united states people are discussing the question should we have a sound currency with unemployment

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or inflation with full employment this is in fact a very vicious analysis to deal with this problem

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we must raise the question how can one improve the condition of workers and of all other groups of

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the population the answer is by maintaining an unhampered labor market and thus achieving full

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employment our dilemma is shall the market determine wage rates or shall they be determined by union

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pressure and compulsion the dilemma is not shall we have inflation or unemployment this

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mistaken analysis of the problem is argued in england in european industrial countries

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and even in the united states and some people say now look even the united states is inflating

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why should we not do it also to these people one should answer first of all one of the privileges

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of a rich man is that he can afford to be foolish much longer than a poor man and this is the situation

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of the united states the financial policy of the united states is very bad and getting worse

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perhaps the united states can afford to be foolish a bit longer than some other countries

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the most important thing to remember is that inflation is not an act of god inflation is

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not a catastrophe of the elements or a disease that comes like the plague inflation is a policy

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a deliberate policy of people who resort to inflation because they consider it to be a lesser

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evil than unemployment but the fact is that in the not very long run inflation does not cure

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unemployment inflation is a policy and a policy can be changed therefore there is no reason to

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give in to inflation if one regards inflation as an evil then one has to stop inflating

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one has to balance the budget of the government of course public opinion must support this the

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intellectuals must help the people to understand given the support of public opinion it is certainly

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possible for the people's elected representatives to abandon the policy of inflation we must remember

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that in the long run we may all be dead and certainly will be dead but we should arrange

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our earthly affairs for the short run in which we have to live in the best possible way and one

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of the measures necessary for this purpose is to abandon inflationary policies

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and that's a wrap on this Austrian audible episode of the bitcoin podcast if you are a

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00:42:52,800 --> 00:42:58,800
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