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 entries,
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 the place where the power resides
to determine how rapidly the amount of money shall increase.
[loud noise from the printing presses]
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 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 2 week period, inflation came to a halt.
After the 2 week period, when the presses started running again,
inflation started up again.
It's that clear, that straightforward.
More recently, there's another dramatic example
of the only effective way to deal with rampant inflation.
[people shouting]
In 1973, Japanese housewives going to market
were faced with an unpleasant fact.
The cash in their purses seemed to be losing its value.
Prices were starting to soar
as the awful story of inflation began to unfold once again.
[traffic noise]
The Japanese government knew what to do.
What's more, they were prepared to do it.
When it was all over, economists were able to record
precisely what had happened.
In 1971, the quantity of money started to grow more rapidly.
As always happens, inflation wasn't affected for a time.
But by late 1972 it started to respond.
In early '73 the government reacted.
It started to cut monetary growth,
but inflation continued to soar for a time.
The delayed reaction made 1973 a very tough year of recession.
Inflation tumbled only when the government
demonstrated its determination to keep monetary growth in check.
It took 5 years to squeeze inflation out of the system.
Japan had attained relative stability.
Unfortunately, there's no way to avoid the difficult road
the Japanese had to follow before they could have both
low inflation and a healthy economy.
First, they had to live through a recession
until slow monetary growth had its delayed effect on inflation.
Inflation is just like alcoholism.
In both cases, when you start drinking
or when you start printing too much money
the good effects come first. The bad effects only come later.
That's why, in both cases, there's a strong temptation to overdo it,
to drink too much, and to print too much money.
When it comes to the cure, it's the other way around.
When you stop drinking or when you stop printing money,
the bad effects come first and the good effects only come later.
That's why it's so hard to persist with a cure.