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If, under the gold standard, a government is asked to spend money for something new, the minister of finance can say, "And where do I get the money? Tell me, first, how I will find the money for this additional expenditure. Under an inflationary system, nothing is simpler for the politicians to do than to order the government printing office to provide as much money as they need for their projects. Under a gold standard, sound government has a much better chance; its leaders can say to the people and to the politicians, "We can't do it unless we increase taxes.

But under inflationary conditions, people acquire the habit of looking upon the government as an institution with limitless means at its disposal: the state, the government, can do anything. If, for instance, the nation wants a new highway system, the government is expected to build it. But where will the government get the money? One could say that in the United States today — and even in the past, under McKinley — the Republican Party was more or less in favor of sound money and of the gold standard, and the Democratic Party was in favor of inflation, of course not a paper inflation, but a silver inflation.

And President Cleveland justified his veto by writing: "While it is the duty of the citizens to support the government, it is not the duty of the government to support the citizens. I am rather embarrassed by the necessity to simplify these problems. There are so many complex problems in the monetary system, and I would not have written volumes about them if they were as simple as I am describing them here. But the fundamentals are precisely these: if you increase the quantity of money, you bring about the lowering of the purchasing power of the monetary unit.

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This is what people whose private affairs are unfavorably affected do not like. People who do not benefit from inflation are the ones who complain. If inflation is bad and if people realize it, why has it become almost a way of life in all countries? Even some of the richest countries suffer from this disease. The United States today is certainly the richest country in the world, with the highest standard of living. But when you travel in the United States, you will discover that there is constant talk about inflation and about the necessity to stop it.

Indian Investors: how inflation is hurting your returns

But they only talk; they do not act. To give you some facts: after the First World War, Great Britain returned to the prewar gold parity of the pound. That is, it revalued the pound upward. This increased the purchasing power of every worker's wages. In an unhampered market the nominal money wage would have fallen to compensate for this and the workers' real wage would not have suffered. We do not have time here to discuss the reasons for this. But the unions in Great Britain were unwilling to accept an adjustment of money wage rates downward as the purchasing power of the monetary unit rose.

Therefore real wages were raised considerably by this monetary measure.

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This was a serious catastrophe for England, because Great Britain is a predominantly industrial country that has to import its raw materials, half-finished goods, and food stuffs in order to live, and has to export manufactured goods to pay for these imports. With the rise in the international value of the pound, the price of British goods rose on foreign markets and sales and exports declined. Great Britain had, in effect, priced itself out of the world market. The unions could not be defeated. You know the power of a union today. It has the right, practically the privilege, to resort to violence.

And a union order is, therefore, let us say, not less important than a government decree. The government decree is an order for the enforcement of which the enforcement apparatus of the government — the police — is ready. You must obey the government decree, otherwise you will have difficulties with the police. Unfortunately, we have now, in almost all countries all over the world, a second power that is in a position to exercise force: the labor unions.

The labor unions determine wages and then strike to enforce them in the same way in which the government might decree a minimum wage rate. I will not discuss the union question now; I shall deal with it later. I only want to establish that it is the union policy to raise wage rates above the level they would have on an unhampered market.

As a result a considerable part of the potential labor force can be employed only by people or industries that are prepared to suffer losses.

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And, since businesses are not able to keep on suffering losses, they close their doors and people become unemployed. The setting of wage rates above the level they would have on the unhampered market always results in the unemployment of a considerable part of the potential labor force. In Great Britain, the result of high wage rates enforced by the labor unions was lasting unemployment, prolonged year after year.

Millions of workers were unemployed, production figures dropped. Even experts were perplexed. In this situation the British government made a move which it considered an indispensable, emergency measure: it devalued its currency. The result was that the purchasing power of the money wages, upon which the unions had insisted, was no longer the same. The real wages, the commodity wages, were reduced. Now the worker could not buy as much as he had been able to buy before, even though the nominal wage rates remained the same.

In this way, it was thought, real wage rates would return to free market levels and unemployment would disappear.


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This measure — devaluation — was adopted by various other countries, by France, the Netherlands, and Belgium. One country even resorted twice to this measure within a period of one year and a half. That country was Czechoslovakia. It was a surreptitious method, let us say, to thwart the power of the unions. You could not call it a real success, however.

After a few years, the people, the workers, even the unions, began to understand what was going on. They came to realize that currency devaluation had reduced their real wages. The unions had the power to oppose this. In many countries they inserted a clause into wage contracts providing that money wages must go up automatically with an increase in prices. This is called indexing. The unions became index conscious. So, this method of reducing unemployment that the government of Great Britain started in — which was later adopted by almost all important governments — this method of "solving unemployment" no longer works today.

Indian Investors: how inflation is hurting your returns

In , in his General Theory of Employment, Interest and Money , Lord Keynes unfortunately elevated this method — the emergency measures of the period between and — to a principle , to a fundamental system of policy. And he justified it by saying, in effect, "Unemployment is bad. If you want unemployment to disappear you must inflate the currency. He realized very well that wage rates can be too high for the market, that is, too high to make it profitable for an employer to increase his work force, thus too high from the point of view of the total working population, for with wage rates imposed by unions above the market only a part of those anxious to earn wages can obtain jobs.

And Keynes said, in effect, "Certainly mass unemployment prolonged year after year, is a very unsatisfactory condition. In old fashioned language, Keynes proposed cheating the workers. Instead of declaring openly that wage rates must be adjusted to the conditions of the market — because, if they are not, a part of the labor force will inevitably remain unemployed — he said, in effect, "Full employment can be reached only if you have inflation. Cheat the workers. But the goal of full employment remained.

What does "full employment" mean? It has to do with the unhampered labor market, which is not manipulated by the unions or by the government. On this market, wage rates for every type of labor tend to reach a point at which everybody who wants a job can get one and every employer can hire as many workers as he needs. If there is an increase in the demand for labor, the wage rate will tend to be greater, and if fewer workers are needed, the wage rate will tend to fall.

The only method by which a "full employment" situation can be brought about is by the maintenance of an unhampered labor market. This is valid for every kind of labor and for every kind of commodity. What does a businessman do who wants to sell a commodity for five dollars a unit? When he cannot sell it at that price, the technical business expression in the United States is, "the inventory does not move.

He cannot retain things because he must buy something new; fashions are changing. So he sells at a lower price. If he cannot sell the merchandise at five dollars, he must sell it at four. If he cannot sell it at four, he must sell it at three. There is no other choice as long as he stays in business. He may suffer losses, but these losses are due to the fact that his anticipation of the market for his product was wrong. It is the same with the thousands and thousands of young people who come every day from the agricultural districts into the city trying to earn money.

It happens so in every industrial nation.

This may be impossible. T he hunt for signs of exuberance in the Australian economy will have to continue as the latest inflation figures released by the Australian Bureau of Statistics on Wednesday showed that demand in the economy remains utterly stagnant. Whenever I look at the inflation figures I always think the best financial advice anyone can ever get is to quit smoking.


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  • That of course is not the main reason why you should do it, but once again in September the biggest contributor to inflation was tobacco. While the overall rate of inflation in the past year was 1. While the consumer price index rose 1. In effect there is less pressure for the Reserve Bank to worry about rising prices now than at any time in its history.


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    • In the past quarter, average core inflation was just 0. The CPI did increase by 0. Aside from tobacco, the big drivers of prices in September were recreation and culture and clothing:. Now that might, again, seem like a good thing — if the prices of recreational and more discretionary items such as clothing are rising, then surely that means people are opening their wallets, going shopping and doing fun things?