Milton Friedman - Understanding Inflation

the sierra nevada's in california 10 000 feet above sea level in the winter temperatures drop to 40 below zero in the summer the place bakes in the thin mountain air in this unlikely spot the town of bodie sprang up in its day bodhi was filled with prostitutes drunkards and gamblers part of the colorful history of the american west a century ago this was a town of ten thousand people what brought them here gold if this were real gold people would be scrambling for it a series of gold strikes throughout the west brought people from all over the world all kinds of people they came here for one purpose and one purpose only to strike it rich quick but in the process they built towns cities in places where nobody would otherwise have dreamed of building a city gold built these cities and when the gold was exhausted the cities collapsed and became ghost towns many of the people who came here ended up the way they began broken unhappy but a few struck it rich for them gold was real wealth but was it for the world as a whole people couldn't eat the gold they couldn't wear the gold they couldn't live in houses made of gold because there was more gold they had to pay a little more gold to buy goods and services the prices of things in terms of gold went up at tremendous cost at sacrifice of lives people dug gold out of the bowels of the earth what happened to that gold eventually at long last it was transported to distant places only to be buried again under the ground this time in the vaults of banks throughout the world there's hardly anything that hasn't been used for money rock salt in ethiopia brass rings in west africa cowrie shells in uganda even a toy cannon anything can be used as money crocodile money in malaysia absurd isn't it that beleaguered minority of the population that still smokes may recognize this stuff as the raw material from which their cigarettes are made but in the early days of the colonies long before the united states was established this was money it was a common money of virginia maryland and the carolinas it was used for all sorts of things the legislature voted that it could be used legally to pay taxes it was used to buy food clothing and housing indeed one of the most interesting sites was to see the husky young fellas at that time lug 100 pounds of it down to the docks to pay the costs of the passage of the beauteous young ladies who had come over from england to be their brides now you know how money is there's a tendency for it to grow for more and more of it to be produced and that's what happened with this tobacco as more tobacco was produced there was more money and as always when there's more money prices went up inflation indeed at the very end of the process prices were 40 times as high in terms of tobacco as they had been at the beginning of the process and as always when inflation occurs people complained and as always the legislature tried to do something and there's always to very little avail they prohibited certain classes of people from growing tobacco they tried to reduce the total amount of tobacco grown they required people to destroy part of their tobacco but it did no good finally many people took it into their own hands and they went around destroying other people's tobacco fields that was too much and they passed a law making it a capital offense punishable by death to destroy somebody else's tobacco gresham's law one of the oldest laws in economics was well illustrated that law says that cheap money drives out deer money and so it was with tobacco anybody who had a debt to pay of course tried to pay it in the worst quality of tobacco he had he saved a good tobacco to sell overseas for hard money the result was that bad money drove out good money finally almost a century after they had started using tobacco's money they established warehouses in which tobacco was deposited in barrels certified by an inspector according to his views as to its quality and quantity and they issued warehouse certificates which people gave from one to another to pay for the bills that they accumulated these pieces of green printed paper are today's counterparts of those tobacco certificates except that they bear no relation to any commodity the fact is that most people enjoy the early stages of the inflationary process britain in the swinging 60s there was plenty of money around business was brisk jobs were plentiful and prices had not yet taken off everybody seemed happy at first but by the early 70s as the good times rolled along prices started to rise more and more rapidly soon some of these people were going to lose their jobs the party was coming to an end the story is much the same in the united states only the process started a little later we've had one inflationary party after another yet we still can't seem to avoid them how come before every election our representatives would like to make us think we're getting a tax break and they're able to do it while at the same time actually raising our taxes because of a bit of magic they have in their kit bag that magic is inflation they reduce the tax rates but the taxes we have to pay go up because we are automatically shoved into higher brackets by the effect of inflation a neat trick taxation without representation the more i work it seems like the more they take off me i know if i work an extra day or two extra days what they take in federal income tax alone is is almost doubled because it apparently puts you in a higher income tax bracket and takes more off you bob crawford lives with his wife and three children in a suburb of pittsburgh they're a fairly average american family don't slam the door daphne okay all right how are you doing making your favorite dish we went to the crawford's home after he'd spent a couple of days working out his federal and state income taxes for the year for our benefit he tried to estimate all the other taxes he had paid as well in the end though he didn't discover much that will surprise anybody inflation is going up everything's getting more expensive no matter what you do as soon as you walk out of the house everything going up your gas bills keep going up electric bills your gasoline you can name a thousand things that are going up but just everything is going sky high your food my wife goes to the grocery store we used to live on say 60 or 50 dollars every two weeks just for our basic food now it's 80 or 90 every two weeks things were just they're going out of sight as far as expense to live on like i say it's getting tough and and seems like every month it gets worse and worse and i don't know where it's going to end the end of the day i've spent nearly six thousand dollars of my earnings on taxes that leaves me with a total of twelve thousand dollars to live on that might seem like a lot of money but five six years ago i was earning twelve thousand dollars how does taxation without representation really affect how much the crawford family has left to spend after it's paid its income taxes well in 1972 bob crawford earned twelve thousand dollars some of that income was not subject to income tax after paying income tax on the rest he had this much left to spend six years later he was earning eighteen thousand dollars a year by 1978 the amount free from tax was larger but he was now in a higher tax bracket so his taxes went up by a larger percentage than his income however those dollars weren't worth anything like as much even his wages let alone his income after taxes hadn't kept up with inflation his buying power was lower than before that is taxation without representation in practice we had a number of you brothers that are sitting here today that were with us on a committee and i'd like to tell you one of the things there are many traditional scapegoats blamed for inflation how often have you heard inflation blamed on labor unions for pushing up wages costs workers of course don't agree but fellas this is not true this is subterfuge this is a myth your wage rates are not creating inflation and he's right higher wages are mostly a result of inflation rather than a cause of it economists in this country indeed the impression that unions cause inflation arises partly because union wages are slow to react to inflation and then there's pressure to catch up on a day-to-day basis trying to represent our own members but that in fact is not the case not only can we not play catch-up we can't even maintain a wage rate commensurate with the cost of living it's going up in this country the reason we have inflation in the united states or for that matter anywhere in the world is because these pieces of paper and the accompanying book entry or their counterparts in other nations are growing more rapidly than the quantity of goods and services produced the truth is inflation is made in one place and one place only here in washington this is the only place where there are presses like this to turn out these pieces of paper we call money this is a place where the power resides to determine how rapidly the amount of money shall increase what happened to all that noise that's what would happen to inflation if we stopped letting the amount of money grow so rapidly this is not a new idea it's not a new cure it's not a new problem it's happened over and over again in history sometimes inflation has been cured this way on purpose sometimes it's happened by accident during the civil war the north late in the civil war overran the place in the south where the printing presses were setting up where the pieces of paper were being turned out prior to that point the south had had a very rapid inflation if my memory serves me right something like four percent a month it took the confederacy something over two weeks to find a new place where they could set up their printing presses and start them going again during that two-week period inflation came to a halt after the two-week period when the presses started running again inflation started up again it's that clear that straightforward

Channel: LibertyPen

Views: 1,881,977

Keywords: inflation, money, gold, history, currency, tobacco, commodities, production, prices, politicians, regulation, economics, Gresham's law, inflationary process, Britain, British, tax, taxation without representation, workers, unions, government, federal income tax, bills, Federal Reserve, money creation, quantitative easing, Civil War

Id: GJ4TTNeSUdQ

Length: 13min 41sec (821 seconds)

Published: Mon Mar 24 2014