Milton Friedman - Understanding Inflation
Summary
TLDRThe video script narrates the history of Bodie, a Californian town that boomed with the gold rush, illustrating the cycle of wealth and decline. It explores how gold's allure drew people worldwide, leading to the establishment and eventual abandonment of towns as resources dwindled. The script delves into the concept of money, using historical examples like tobacco in colonial America, to explain inflation's impact on purchasing power. It highlights how inflation, not wages, is the primary driver of rising prices, and criticizes the government's role in money supply, which fuels inflation.
Takeaways
- 🏔️ The Sierra Nevada's harsh climate, with extreme temperatures, once hosted the gold-rush town of Bodie, illustrating the allure and risks of gold mining.
- 🏠 Gold strikes in the American West led to the rapid formation of towns like Bodie, which boomed with a diverse population seeking wealth but often ended in ghost towns once gold reserves were depleted.
- 🌟 Gold's allure was so strong that it drove people to build cities in inhospitable areas, only for these cities to collapse when the gold ran out.
- 💰 Gold, while valuable, is not practical for everyday use, leading to a need for a more functional form of currency.
- 🌐 Historically, various items have served as currency worldwide, from rock salt to cowry shells, demonstrating the diverse nature of money throughout history.
- 🚬 In early American colonies, tobacco was used as a form of money, influencing economic activities and leading to inflation when overproduced.
- 📈 The script highlights the economic principle 'bad money drives out good money,' as seen in the tobacco economy where low-quality tobacco was used to pay debts.
- 📉 Inflation, as experienced in the tobacco economy, can lead to a decrease in purchasing power, impacting the standard of living for individuals and families.
- 💼 The video script discusses the impact of inflation on taxation, where individuals may see an increase in their taxes due to being pushed into higher brackets despite earning more.
- 🏛️ The root of inflation is attributed to the rapid increase in money supply, as controlled by central authorities, rather than factors like union wages.
Q & A
What was the main reason people flocked to Bodie during its peak?
-People came to Bodie primarily for gold. The gold rush attracted individuals from all over the world, eager to strike it rich quickly.
What happened to towns like Bodie after the gold was exhausted?
-After the gold was exhausted, towns like Bodie collapsed and became ghost towns as people left, with many ending up broke and unhappy.
What effect did the discovery of gold have on the economy at the time?
-The discovery of gold led to an increase in its supply, causing prices of goods and services to rise, which resulted in inflation.
Why does the script refer to gold being buried again in the vaults of banks?
-This refers to the practice of banks storing gold reserves in vaults after it was extracted from the earth, a process that made gold more of a financial asset than something usable in everyday life.
What does Gresham’s Law suggest in relation to money?
-Gresham’s Law suggests that 'bad money drives out good money.' This means people will use lower-quality currency to pay off debts while keeping higher-quality money for themselves.
What inflationary problems arose from using tobacco as currency in colonial America?
-As more tobacco was produced, the value of tobacco currency dropped, causing inflation. Prices in terms of tobacco rose, leading to economic instability and eventually a need for regulation.
How does the script explain the relationship between inflation and wages?
-The script explains that inflation often causes wages to rise, but these wage increases are more of a reaction to inflation rather than the cause, as workers struggle to keep up with the rising cost of living.
How does the government contribute to inflation, according to the script?
-The government contributes to inflation by printing more money, which increases the money supply without a corresponding increase in goods and services, leading to rising prices.
Why is taxation referred to as 'taxation without representation' in the context of inflation?
-Taxation is called 'taxation without representation' because inflation pushes people into higher tax brackets, effectively increasing their taxes without a formal change in tax rates, and often without their consent.
How was inflation temporarily halted in the South during the Civil War?
-Inflation in the South temporarily halted when Union forces overran the location where the Confederacy’s printing presses were producing money. Inflation resumed after they found a new place to set up the presses.
Outlines
🏔️ The Rise and Fall of Bodie: Gold Rush History
This paragraph delves into the history of Bodie, a town in the Sierra Nevada mountains of California. It highlights the extreme weather conditions, with winter temperatures plummeting to 40 below zero and summer heat intensifying due to the thin mountain air. Bodie's past is painted as a colorful chapter of the American West, filled with prostitutes, drunkards, and gamblers. A century ago, the town was a bustling hub of 10,000 people, drawn by the promise of gold. The narrative explores the cycle of gold strikes attracting people worldwide, the rapid construction of towns, and the subsequent decline once the gold reserves were depleted. It reflects on the futility of gold's value to society, as it cannot be consumed or used directly for living, and how the gold eventually ended up buried in bank vaults, questioning the true wealth gold brings to the world.
💵 The Evolution of Money: From Tobacco to Paper Currency
The second paragraph discusses the concept of money and its various forms throughout history. It starts with the example of Bodie, where gold was the driving force behind the town's prosperity. The narrative then shifts to discuss how different items have served as currency in different cultures, such as rock salt in Ethiopia and cowry shells in Uganda. It particularly focuses on the historical use of tobacco as money in the American colonies, where it was used to pay taxes and for various purchases. The paragraph details the inflationary effects of an oversupply of tobacco as currency, leading to a decrease in its value and an increase in prices. It describes the eventual transition to warehouse certificates for tobacco, which were a precursor to modern paper money. The summary also touches on the psychological aspect of money, where people tend to desire more of it, leading to increased production and inflation.
📈 Inflation and Taxation: Impact on the Middle Class
The final paragraph addresses the impact of inflation and taxation on the middle class, using the example of Bob Crawford and his family. It describes the family's struggle with rising costs of living and how inflation erodes their purchasing power despite an increase in income. The paragraph explains the concept of 'taxation without representation,' where taxes increase due to inflation, pushing people into higher tax brackets without a corresponding increase in real income. It also touches on the political aspect of inflation, where representatives might use it to看似地 provide tax breaks while actually increasing taxes due to inflation. The paragraph concludes with a discussion on the causes of inflation, debunking the myth that labor unions are responsible for it, and instead pointing to the过量发行货币 as the primary driver of inflation.
Mindmap
Keywords
💡Sierra Nevada
💡Bodie
💡Gold Rush
💡Ghost Towns
💡Inflation
💡Taxation without Representation
💡Money Supply
💡Tobacco as Currency
💡Wage Rates
💡Cost of Living
💡Printing Presses
Highlights
The Sierra Nevada in California experiences extreme temperatures, reaching 40 below zero in winter and baking in thin mountain air during summer.
Bodie, a town in the Sierra Nevada, was once filled with prostitutes, drunkards, and gamblers, reflecting the colorful history of the American West.
A century ago, Bodie was a bustling town of 10,000 people, drawn by gold strikes and the hope of striking it rich quickly.
Gold rushes led to the rapid construction of towns and cities in unlikely places, which later became ghost towns when the gold was depleted.
The gold that people mined was eventually transported and buried again in bank vaults worldwide, highlighting the irony of the gold rush.
Various items have been used as money throughout history, including rock salt, brass rings, cowry shells, and even a toy cannon.
In the early days of the American colonies, tobacco was used as a common currency, legally accepted to pay taxes and for goods and services.
The overproduction of tobacco as money led to inflation, with prices rising 40 times higher than at the beginning of its use as currency.
Legislative attempts to control inflation by regulating tobacco production were largely ineffective, leading to people destroying others' tobacco fields.
The concept of 'bad money driving out good' was illustrated by tobacco as people tried to pay debts with lower-quality tobacco, saving the best for hard currency.
Warehouse certificates, which were a precursor to modern paper money, were introduced to regulate the quality and quantity of tobacco used as money.
Inflation can initially make people feel prosperous, as was the case in Britain during the Swinging 60s, but it often leads to economic decline as prices rise rapidly.
Inflation can be a hidden tax, as people may see their tax brackets increase due to the effect of inflation, even if tax rates are reduced.
Bob Crawford's family experiences the effects of inflation firsthand, with increased costs for basic necessities and a decrease in purchasing power.
Inflation is often blamed on labor unions for pushing up wages, but this is a myth; higher wages are mostly a result of inflation, not a cause.
The root of inflation lies in the rapid growth of money supply, which outpaces the production of goods and services.
Historical examples show that controlling the money supply can curb inflation, as seen during the Civil War when printing presses were temporarily halted.
Transcripts
[Music]
the Sierra Nevada is in
California 10,000 ft above sea
level in the winter temperatures Dro to
40 below zero
in the summer the place bakes in the
thin Mountain
Air in this unlikely spot the town of
bod sprang
up in its day Bodi was filled with
prostitutes drunkards and
gamblers part of the colorful history of
the American West
[Music]
[Music]
a century ago this was a town of 10,000
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 broke and unhappy but a
few struck at Rich for them gold was
real wealth but was it for the world as
a hole 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
cowry shells in
Uganda even a toy Cannon anything can be
used as
money crocodile money in Malaysia absurd
isn't it
that baguer 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
beautious 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 his 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 as 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 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 Gram'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 the
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 as 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
[Music]
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
time rolled along prices started to rise
more and more
rapidly soon some of these people were
going to lose their
jobs got
it the party was coming to an end
[Music]
sh we're on top of the
world 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 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 of 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 it puts you in a
higher income tax bracket and it takes
more off
[Applause]
you bump Crawford lives with his wife
and three children in a suburb of
Pittsburgh they're a fairly average
American
[Music]
family don't slam the door daffne okay
all right what are you doing making your
favorite dick
no 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 uh your
gasoline uh you can name a thousand
things that are going up just
everything's going Sky High your food my
wife goes to to the grocery store we
used to live on say $60 or $50 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 and seems like
every month it gets worse and worse
and I don't know where it's going to
end at the end of the day I spent nearly
$6,000 of my earnings on
taxes that leaves me with a total of
$122,000 to live
on that might seem like a lot of money
but five six years ago I was earning
[Music]
$112,000 how does taxation without
representation really effect how much
the Crawford family has left to spend
after it's paid its income
taxes well in 1972 Bob Crawford earned
$122,000 some of that income was not
subject to income tax after paying
income tax on the rest he had this much
left to spend 6 years later he was
earning $188,000 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 number of you brothers
that are sitting here today that were
with us on that committee and uh 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 workers of course don't
agree but fellas this is not true this
is sube this is a myth your wage rates
are not creating
inflation and he's
right a serious higher wages are mostly
a result of inflation rather than a
cause of it Economist in this country
indeed the impression that unions cause
inflation arises partly because union
wages are slow to react to inflation
inflation and then there's pressure to
catch up on a day-to-day basis trying to
represent our own members that that in
fact is not the
case not only can we not play catchup we
can't even
maintain a wage rate commensurate with
the cost of living that'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 ENT 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 that 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 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 4% a month it took the
Confederacy something over 2 weeks to
find a new place where they could set up
their printing presses and start them
going again during that 2E period
inflation came to a
hul after the 2 we period when the
presses started running again inflation
started up again it's that clear that
straightforward
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