As I say that's a very small sample of the evidence that is available on the linkage between the quantity of money on th

[answerhappygod]

As I say that's a very small sample of the evidence that is available on the linkage between the quantity of money on the one hand and prices on the other. That evidence is available for hundreds of years in many countries, and there are no exceptions. But that only gets you to first base. The question is why is, why is it that the quantity of money increases relative to output? If you go back 100 years ago, and here in California this is very appropriate to go back a little more than 100 years ago. Sometimes the quantity of money increased more rapidly than output because of discoveries of gold or precious metals.
As you know you had the gold rush in California in late 1840s early 1850s. You had the Australian gold discoveries in the same period in 1850s. And you had a worldwide inflation as a result. In the 1890s to 1913, you had a worldwide inflation because of the perfection of the cyanide process for extracting gold from low grade ore, which produced an outpouring of gold from South Africa, to supplement the gold strikes up in Alaska.
But those were the good old days before the days when governments discovered that it could escape from that relic of an earlier time, the discipline of gold, and that it had a much more scientific method of controlling the quantity of money, by ending the link to gold, and instead turning to government-dominated money. And today, you do not have inflation for those reasons. Today you have inflation because governments create a very large quantity of money. The question is why do governments do that?
And today in the main, there are fundamentally three reasons, in my opinion, why we have experienced inflation and why it is a threat. The first, and by far the most important, is in order to pay for government spending. Now of course, I say the government does this. That's wrong. The government doesn't do it, you do it I do it, we the citizen do it.
We tell the people in Washington, we tell our congressmen and our senators, and our representatives, we want you to spend more money on us. But we don't want you to put any taxes on us, oh no. We don't want you to
levy taxes. We want you to spend more, but we don't want you to tax more. There is no way you can do the one without the other.
The real tax on the American people is what government spends. If the federal government spends $450 billion dollars, and only raises $400 billion in taxes, who do you suppose who pays that other $50 billion? Do you supposed the tooth
fairy does? You pay it, and I pay it. And one of the ways we pay it is by the tax, which we call inflation.
Inflation is, from this point of view, a form of taxation. If government spends more than it takes in the form of things that are called taxes, it has to meet the difference, either by printing money or by borrowing from the public at large. Printing money is a very attractive device, because inflation from the point of view of a person sitting in Congress or in the Senate is a wonderful tax. He doesn't have to vote for it.
Have you ever known of a congressman who got up and said, "I vote to impose a tax in the form of inflation of 10% next year."? No sir-ee. Inflation is a tax which is imposed without representation, and which nobody has to vote for. And of course it's a marvelous tax from the point of view of a congressmen trying to meet the demands of his constituents for more spending.
Inflation yields tax revenue in three different ways. It yields a directly. We think of these pieces of paper we carry in our pocket is money. But it would be just as accurate to think of those as receipts for the taxes you've paid. If you pay the government $100 directly in taxes, the government sends you back a receipt, you pay us
a $100 in taxes.
Well now, the beauty of printing money is that the receipt is right straight with the payment of taxes. What you're getting there, or not, is not money, but tax receipts. And from the point of view of the government, those pieces of paper and I'm exaggerating of course, they're not really pieces of paper, that's only the primitive way of doing it. In our modern age we do it in a more sophisticated way through using a bookkeeper's pen or a computer, instead of having to turn the printing press. It's in a form called deposits, one of the most misleading terms in the human language.
When I think of a deposit, I think I put something there, and there it is. But you know when you go into a bank and deposit money, the people behind the counter run as fast as they can to another part of the bank to pay it out over another counter in the form of loans. It's not deposited there. And similarly, when the government sends a check, it may, in effect be doing the equivalent of printing paper money.
I won't go into the details of that process you will get the right answer if you think of it strictly as printing paper money. So the government gets revenue from inflation directly in the form of these pieces of paper. It can go out and spend without having gotten taxes from anybody. But it also gets revenue in
two other ways. In the first place, with a kind of tax system we have, inflation raises other kinds of taxes without anybody having to vote for it.
You might think that if prices go up by 10% and your income goes up by 10% you're in the same position as you were before. But you're not. You're pushed up into higher brackets of the income tax, and on the average if prices go up 10%, of your income goes up 10%, your taxes will go up 15%. So that the Congress, again, is in a marvelous position. It can vote to lower tax rates when in fact taxes are going up.
There's a lot of talk in the papers these days, in the news these days, about the president proposing a tax cut next year. That's pure fiction. Nobody is proposing a tax cut. These much-publicized tax cuts of the past few years have not been tax cuts at all. Inflation has raised taxes, . And the so-called tax cuts has given back a small part of that to the taxpayer. But the actual taxes that taxpayers have paid have gone up, as a result of the automatic effects of inflation.
In the third place the government gets revenue from inflation by repudiating its debt. Many people keep worrying about the government debt. That's not something you should worry about, because the government debt today is smaller, that is the announced government debt, the open and aboveboard government debt bonds outstanding and the like, is smaller as a percentage of the national income than it was 20, 30 years ago.