Tape 191 - Money, Inventories, Communists in Italy
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- | Hello, this is Rose Freidman | 0:02 |
inviting you on behalf of Instructional Dynamics | 0:04 | |
to another conversation with Milton Freidman, | 0:07 | |
Professor of Economics at the University of Chicago. | 0:10 | |
We are taping this conversation in mid May. | 0:13 | |
As is our custom, what's the situation | 0:17 | |
on the (laughing) monetary front? | 0:20 | |
- | Well the monetary explosion | 0:22 |
that has been going on for some months now | 0:24 | |
seems to be continuing. | 0:26 | |
Over the past year as a whole, | 0:28 | |
that is from April of 1975, | 0:31 | |
to April of 1976, | 0:35 | |
the last month for which we have figures for a whole month. | 0:37 | |
M2 rose at the annual rate of 10% | 0:41 | |
and M1 rose at the annual rate of 6%, 6.1%. | 0:44 | |
But that number conceals the wide variations | 0:48 | |
within the period. | 0:52 | |
For M2, from April of 1975 to July | 0:54 | |
M1, M2 went up at 14%. | 0:58 | |
From July to December it went up at 6%. | 1:02 | |
From December to April it went up at close to 13%. | 1:05 | |
So, in its usual behavior the Fed was swinging wildly | 1:09 | |
from one side of the road to the other. | 1:13 | |
The M1 numbers show a similar pattern. | 1:16 | |
10.2% from April to July. | 1:21 | |
2.6% for July to December 1975. | 1:23 | |
And 7.7% from December '75 to April '76. | 1:28 | |
Moreover, for M1 in particular, | 1:33 | |
the rate of growth is recently | 1:37 | |
been accelerating rather sharply. | 1:39 | |
It was 7.7% for the past five months | 1:41 | |
but 8.5 for the past four, | 1:44 | |
11.0 for the past three and 12.5 for the past two. | 1:46 | |
The reason for these movements from side to side | 1:53 | |
are fairly clear as I've indicated so many times before. | 1:57 | |
They reflect the way in which the Fed operates | 2:01 | |
in trying to control the money supply. | 2:04 | |
It operates through the Federal funds right. | 2:06 | |
Whenever market forces are tending lower interest rates, | 2:08 | |
the Fed tends to lean against that force. | 2:12 | |
The only way it can do so is by promoting | 2:15 | |
a slower rate of monetary growth than it intends. | 2:17 | |
Conversely, whenever a short term interest rates | 2:21 | |
are tending to rise, | 2:23 | |
the Fed tends to lean against that. | 2:25 | |
It can do that only by producing a more rapid rate | 2:27 | |
of monetary growth than it intends to. | 2:30 | |
In the later part of 1976, | 2:33 | |
when the Fed's rate of monetary growth was very slow, | 2:38 | |
rates, short term rates were coming down. | 2:42 | |
The recent explosion is about as good an evidence | 2:46 | |
as you can want that there is at the moment | 2:50 | |
upward pressure on interest rates | 2:52 | |
which the Fed has been trying to resist. | 2:55 | |
It has in the past few weeks | 2:58 | |
raised its trigger point on federal funds, | 3:01 | |
the federal funds rate at which it seeks to maintain | 3:04 | |
by about a half a percentage point. | 3:08 | |
From about 4 3/4% to somewhere up around 5 1/4%. | 3:10 | |
How much longer the monetary explosion will continue | 3:16 | |
depends entirely on this interplay | 3:21 | |
between the market forces affecting the short term rates | 3:24 | |
and the rapidity of the Fed | 3:27 | |
in catching up with or adjusting to it. | 3:29 | |
If we judge from these past episodes, | 3:33 | |
the swings have lasted about five months. | 3:36 | |
April to July is only four months. | 3:40 | |
July to December is only about five months. | 3:44 | |
December to April is now about four months. | 3:46 | |
So, on this basis it would look as if | 3:51 | |
you had a couple more months to go. | 3:54 | |
However, that may not be a very good basis | 3:56 | |
for judging what the Fed is going to do. | 3:59 | |
They are certainly in this year under great pressure | 4:03 | |
to try to avoid any drastic moves one way or another. | 4:07 | |
And particularly, they will be hesitant to allow | 4:11 | |
to raise the Federal funds rate very dramatically. | 4:15 | |
So, it may be that this explosion will last some what longer | 4:19 | |
but that is in the lap of Gods | 4:22 | |
and I have more or less given up | 4:25 | |
trying to predict these short run gyrations | 4:26 | |
in the Fed's behavior. | 4:30 | |
The gyrations have had as I have noted before, | 4:34 | |
some impact on the course of economic activity | 4:38 | |
with a much more rapid rate of growth | 4:42 | |
in industrial production in the early part | 4:43 | |
of the expansion than in the later months | 4:46 | |
of 1975 and the early months of '76. | 4:51 | |
The more rapid rate of monetary growth | 4:55 | |
seems not yet to have shown up | 4:58 | |
in its impact on any of the magnitudes. | 5:00 | |
So far as the average rate of growth | 5:04 | |
over the past year is concerned, | 5:07 | |
a 10% rate of growth in M2, | 5:09 | |
a 6% rate of growth in M1 implies something like | 5:12 | |
a nine, 10% rate of GNP growth for this coming year. | 5:17 | |
It also implies something like perhaps | 5:24 | |
a 6%, 5-6% inflation rate. | 5:27 | |
So that as yet there is no particular reason | 5:30 | |
to alter the kinds of predictions | 5:34 | |
we have been making about the average rate | 5:37 | |
of behavior over the next year or so. | 5:40 | |
However, if the rate of, | 5:44 | |
if the monetary explosion should continue, | 5:47 | |
if the Fed should permit the rate of monetary growth | 5:50 | |
to settle at the continue at its present level | 5:54 | |
or at a very high level, | 5:57 | |
then of course, we would have to start revising | 5:58 | |
the inflation predictions for 1977, | 6:01 | |
though not yet for 1976. | 6:03 | |
- | The Wall Street Journal had a piece the other day | 6:07 |
about business inventories increasing | 6:11 | |
6/10ths of a percent in March | 6:14 | |
to a seasonally adjusted 269 billion dollars. | 6:16 | |
They went on to say that this was | 6:22 | |
the third consecutive monthly gain | 6:24 | |
and another favorable economic sign. | 6:26 | |
Is this necessarily a favorable economic sign? | 6:29 | |
- | Inventories are one of the most tricky elements | 6:33 |
to analyze and is by no means clear | 6:35 | |
that a rise in inventories is a favorable sign. | 6:40 | |
In the first place, everything depends | 6:45 | |
on why inventories rise. | 6:47 | |
If inventories rise because sales are less | 6:50 | |
than businessmen anticipated, | 6:54 | |
so that the rise in inventories is an unanticipated rise, | 6:57 | |
well then the effect of that of course | 7:02 | |
is an unfavorable sign. | 7:04 | |
What that means is that businessmen | 7:06 | |
are going to have unduly high inventories | 7:08 | |
and then consequently they will be cutting down | 7:11 | |
in production in order to get inventories in line. | 7:13 | |
On the other hand, if inventories rise | 7:17 | |
because businessmen intend them to rise | 7:19 | |
because given the course of sales in recent months, | 7:23 | |
they would like to get their inventories larger | 7:28 | |
in line with their increased sales. | 7:30 | |
Then that's a rather neutral factor. | 7:32 | |
It is a neutral factor in the sense | 7:36 | |
that it adds to employment. | 7:41 | |
Total GNP rises by more than | 7:45 | |
the rise in so called final demand. | 7:49 | |
Goods and services available for final investment | 7:53 | |
or final consumers. | 7:55 | |
It rises by this increase in inventories | 7:57 | |
and that means that there is employment. | 7:59 | |
But the employment does not correspond | 8:02 | |
to any goods available for people to purchase. | 8:04 | |
So, from an employment point of view | 8:07 | |
it's a good thing. | 8:09 | |
From a consumption investment point of view it is not. | 8:13 | |
So far as its implications for the future are concerned, | 8:19 | |
a rise in business inventories | 8:23 | |
can only be interpreted as a favorable sign | 8:26 | |
if it is taken first to have been an intended rise | 8:28 | |
and second to have been a rise at a lower rate | 8:33 | |
than businessmen really intended | 8:37 | |
so that they still have some unmet inventories, | 8:38 | |
some desired inventories that they have not yet achieved. | 8:44 | |
In this case, the favorable element is what it reflects | 8:48 | |
about the expectations and anticipations | 8:51 | |
of business community. | 8:54 | |
But on the whole, I would say, | 8:59 | |
that one oughta look at business inventory change | 9:00 | |
with a very skeptical notion | 9:04 | |
and not either take any encouragement or discouragement | 9:09 | |
from a simple increase or a decrease | 9:14 | |
unless one can analyze the forces in back of it | 9:16 | |
and choose between an intended and an unintended | 9:20 | |
inventory increase. | 9:23 | |
A less than intended or a more than intended | 9:24 | |
inventory increase. | 9:27 | |
- | Moving to a quite different area. | 9:29 |
There's been a fair amount of talk | 9:32 | |
about the growing likelihood of communist governments | 9:33 | |
in Italy and France. | 9:37 | |
Some of the talk has indicated | 9:40 | |
that it won't have much affect as far as | 9:42 | |
their relationship with the United States or with NATO. | 9:45 | |
And others of course, have been more alarming. | 9:49 | |
What is your reaction to that? | 9:53 | |
- | Well, I think the issue is | 9:55 |
a very important one. | 9:59 | |
And the important aspects of it | 10:02 | |
are not necessarily those which are given | 10:05 | |
the greatest attention in the news media. | 10:09 | |
In the main, the news media tend | 10:12 | |
to stress the political aspects of it. | 10:14 | |
They ask whether the communists are serious | 10:17 | |
when they say that they wanna be | 10:19 | |
a constructive force in the Italian government. | 10:20 | |
Well then the communists are serious | 10:23 | |
in saying that they are willing to accept | 10:25 | |
the judgment of the democracy | 10:27 | |
and to leave office if they're voted out | 10:29 | |
et cetera, et cetera, et cetera. | 10:31 | |
Now, one may have strong feelings about those issues. | 10:32 | |
Personally, I believe that | 10:36 | |
a dog barks, a cat meows, | 10:40 | |
and communists stick with their belief. | 10:44 | |
Their belief may not necessarily make them | 10:47 | |
devitates of Moscow. | 10:52 | |
You've had independent communist groups | 10:53 | |
like Tito in Yugoslavia and Mao in China. | 10:55 | |
And it might be that the Italian communist | 10:59 | |
would not, or the French communists | 11:01 | |
would not be the slavees of Moscow, | 11:03 | |
that may be. | 11:06 | |
But it's very hard for me to believe | 11:07 | |
that they have suddenly given up their belief | 11:08 | |
that the appropriate way to organize society | 11:11 | |
is through authoritarian and collective means. | 11:13 | |
But that isn't the issue I wanna discuss. | 11:15 | |
This issue was brought up in my mind | 11:18 | |
by two things recently. | 11:20 | |
One was a comment that Guido Carli, | 11:24 | |
the former Governor of the Bank of Italy, | 11:30 | |
is reported to have made | 11:32 | |
at the recent business council meeting in Hot Springs, | 11:34 | |
as it was reported to me, | 11:46 | |
what Carli said was that Italy | 11:49 | |
was an extremely open society | 11:52 | |
which relied heavily on imports and exports. | 11:54 | |
That the communist no less than any other group | 11:58 | |
would have to try to maintain | 12:01 | |
a viable export/import business, | 12:03 | |
a viable foreign trade. | 12:07 | |
And that as a result, | 12:10 | |
they would find it in their own interest | 12:13 | |
to follow policies which would promote | 12:16 | |
such foreign trade | 12:20 | |
rather than | 12:22 | |
eliminate it. | 12:25 | |
And as a result as I gather, | 12:27 | |
he did not regard the accession of communists | 12:29 | |
to at least a part of the government of Italy. | 12:34 | |
Their inclusion in the new government | 12:36 | |
after the vote which has now been scheduled, | 12:38 | |
he did not regard this | 12:41 | |
as a clearly negative economic sign | 12:42 | |
from the point of view of Italy's future. | 12:44 | |
The other item which is relevant to this | 12:47 | |
was a paper essentially dealing with this same subject | 12:52 | |
that I received from a friend of mine in California. | 12:55 | |
A, believe it or not, a professor of sociology | 13:01 | |
at the University of California in San Diego | 13:05 | |
by the name of Jack Douglas. | 13:08 | |
Professor Douglas considered the Italian/French situation | 13:14 | |
in a much broader context. | 13:17 | |
And he compared it with earlier examples | 13:20 | |
of left wing governments as for example, | 13:23 | |
in the case of France | 13:26 | |
in the 1930's. | 13:30 | |
But also in a still broader context, | 13:32 | |
namely anything which provided a threat | 13:35 | |
to existing capitals such as not merely private capitals, | 13:39 | |
such as not merely a left wing takeover | 13:42 | |
or anything like that, | 13:44 | |
but also extreme inflation. | 13:46 | |
He cited the example of the early 1920's in France | 13:48 | |
when France had a very erratic inflationary episode | 13:52 | |
which was finally brought under control | 13:57 | |
by in the Poincaré government when Émile Moreau | 14:00 | |
who was then the head of the | 14:04 | |
Bank of France refused to finance governmental expenditures | 14:07 | |
by printing money and stopped the printing of money | 14:13 | |
and you had a re-valuation of the Franc | 14:15 | |
and that stopped the flight of capital | 14:17 | |
which had been going on before that. | 14:19 | |
And enabled France then to go on to a | 14:21 | |
period, a brief period of very rapid progress. | 14:26 | |
And his essential point was | 14:30 | |
that the thing to look at was much less | 14:31 | |
the activities directly of the people who got into power | 14:33 | |
but what those activities did to the attitudes | 14:37 | |
of private owners of capital. | 14:41 | |
His fundamental argument was | 14:45 | |
that if something comes along | 14:47 | |
which tends to frighten capital, | 14:50 | |
leads to an exodus of capital, | 14:52 | |
that this exodus of capital ultimately leaves the country | 14:54 | |
with only two choices. | 14:57 | |
Either a strong authoritarian government | 14:59 | |
which will have to impose the discipline | 15:02 | |
to keep the capital from going out, | 15:05 | |
or to organize the economic system | 15:07 | |
on some basis other than private arrangements. | 15:11 | |
Or else an end to whatever it is | 15:15 | |
that threatens the outflow of capital. | 15:19 | |
He cited the example of the 1930's in France | 15:21 | |
when you had the | 15:25 | |
the Popular Front government under Blum | 15:28 | |
which almost caused a complete collapse of the country. | 15:31 | |
Again because there was fear of a left wing takeover. | 15:35 | |
And he said Blum came up to the point | 15:38 | |
where he either had to move in an authoritarian direction | 15:40 | |
or else he had to step down. | 15:43 | |
And Blum was enough of a believer | 15:45 | |
in the laws of democracy that he stepped down. | 15:46 | |
He cited in the same direction | 15:51 | |
as in still another example | 15:52 | |
and I think a very potent example. | 15:54 | |
Britain's experience in the past 10 years, | 15:56 | |
arguing that what was really happening in Britain | 15:59 | |
was that people who owned property in Britain | 16:01 | |
where trying to get it out of the country. | 16:05 | |
They were certainly unwilling to invest. | 16:07 | |
But this had the effect of turning private enterprises | 16:09 | |
into losing enterprises | 16:11 | |
at which point the government had to step in, | 16:16 | |
or did step in and provided government capital. | 16:18 | |
So you had a substitution of governmental capital | 16:21 | |
for private capital. | 16:23 | |
And unless, he argued, something came along in Britain | 16:26 | |
that restored the confidence of property owners | 16:28 | |
and their property, | 16:30 | |
this process was bound to continue. | 16:33 | |
Similarly in the Italian case, his argument was, | 16:36 | |
that it was a threat of communist in the government | 16:40 | |
or if communists were in the government, | 16:43 | |
the threat of what they might do in the future, | 16:45 | |
that would make any property owner in Italy | 16:47 | |
naturally very fearful of his property, | 16:50 | |
would lead to an exodus of private capital. | 16:53 | |
Of course, a great deal of that has already happened. | 16:55 | |
We know that for example, in the most extreme form, | 16:58 | |
Switzerland has limited the amount of Italian currency, | 17:02 | |
or currency of any kind that may be brought | 17:07 | |
in in suitcases because there was a veritable flood | 17:09 | |
of Italian currency trying to evade | 17:12 | |
Italian Exchange Control regulations | 17:14 | |
in getting into Switzerland in order | 17:16 | |
to be converted into foreign currency. | 17:18 | |
And the Italian government has imposed | 17:20 | |
extensive foreign exchange control | 17:22 | |
to try to prevent the export of capital. | 17:24 | |
But fundamentally there is no way to prevent | 17:27 | |
the export of capital over any long period. | 17:29 | |
There are all sorts of indirect ways | 17:31 | |
in which so long, especially in an open society | 17:33 | |
engaging in extensive international trade, | 17:35 | |
in which capital can directly or indirectly | 17:38 | |
by open means or devious means be exported. | 17:41 | |
I believe this argument is extremely powerful, | 17:46 | |
in that it is far more persuasive to me | 17:50 | |
than is the argument which Dr. Carli made. | 17:54 | |
And I say this with despite the fact | 17:58 | |
that I have the very greatest of admiration | 18:02 | |
for Guido Carli I believe | 18:04 | |
of all the central bankers I have known. | 18:06 | |
He certainly ranks very near the top | 18:09 | |
in terms of ability and understanding | 18:11 | |
of monetary and economic forces. | 18:14 | |
And he did a remarkable job as | 18:16 | |
Governor of the Bank of Italy | 18:19 | |
under very adverse circumstances. | 18:22 | |
And yet, it seems to me, the thing to look for | 18:25 | |
if communists get into the Italian government, | 18:29 | |
is a continued pressure on private capital, | 18:33 | |
a continued exodus of private capital, | 18:36 | |
and the possibility ultimately, | 18:38 | |
and not so ultimately, no so far down the line, | 18:41 | |
of the communists coming up against the gun either. | 18:44 | |
They will have to give up power, | 18:47 | |
get out of the government | 18:49 | |
and essentially take a self-denying ordinance | 18:51 | |
about getting back in. | 18:53 | |
Or else, they will have to move | 18:54 | |
in an authoritarian direction | 18:56 | |
to substitute a centrally controlled economy | 18:58 | |
for a privately directed one. | 19:01 | |
And given of course, their own values and beliefs, | 19:03 | |
it is hard to believe that if they have that choice, | 19:06 | |
they will not take the second | 19:10 | |
rather than the first alternative. | 19:12 | |
- | We have a question from Father Martin Scherberg | 19:16 |
of St. John's University in Minnesota. | 19:20 | |
He asks, he writes, concerning your statement | 19:24 | |
on an earlier tape with respect | 19:28 | |
to the crowding out effect of government deficit financing. | 19:31 | |
Dr. Scherber writes, you said that the fiscalists argue | 19:36 | |
that the crowding out effect is minor | 19:40 | |
largely because in time of depression, | 19:42 | |
government bonds will be bought with quote idle balances. | 19:45 | |
Which at such time supposedly have nowhere else to go. | 19:50 | |
The effect will be an increase in V and total spending | 19:53 | |
and thus a stimulus to the economy. | 19:57 | |
He goes on, the monetarists on the other hand, | 19:59 | |
according to your statement, | 20:02 | |
also believe that the crowding out effect | 20:03 | |
will be relatively minor. | 20:06 | |
But also that the effect on V | 20:07 | |
will be secondary and unimportant. | 20:09 | |
That the major effect will be government borrowing | 20:11 | |
instead of other people borrowing | 20:14 | |
and that interest rates will be only somewhat higher. | 20:16 | |
But this rise in the rate of interest | 20:20 | |
will not be sufficient to induce a large decline | 20:22 | |
in cash balances with a consequent increase in V. | 20:24 | |
The result will simply be spending by the government | 20:28 | |
instead of by the public with no increase | 20:30 | |
in total spending. | 20:33 | |
I am particularly interested in the evidence | 20:36 | |
and reasoning behind that last sentence. | 20:38 | |
- | This is a very important | 20:42 |
and sophisticated question as I would expect | 20:45 | |
from Father Scherber. | 20:47 | |
But I believe it partly also reflects | 20:50 | |
some misunderstanding of my position | 20:53 | |
or a misstatement by me in the earlier cassette | 20:55 | |
of what that position is. | 20:57 | |
It is not correct that the monaterists | 21:00 | |
believe that the crowd out effect | 21:02 | |
of government deficit financing | 21:05 | |
will be relatively minor. | 21:07 | |
On the contrary, we believe that on the whole, | 21:09 | |
or I believe, let me speak only for myself, | 21:13 | |
that the crowding out effect is likely to be substantial. | 21:16 | |
And that indeed the bulk of government | 21:19 | |
well let me say that a little bit less extreme fashion, | 21:25 | |
that a very large fraction of government deficit spending | 21:30 | |
will in fact take the place of private spending | 21:35 | |
on investment on housing or on other things | 21:40 | |
that funds might be borrowed. | 21:43 | |
I will come back in a later to a qualification of that | 21:45 | |
on a much deeper level. | 21:48 | |
But for a moment, let me go to the more technical questions | 21:49 | |
that Father Scherber raises. | 21:54 | |
You have to separate out two very different questions. | 21:56 | |
What happens to velocity during the course of an expansion? | 21:59 | |
However that expansion comes about. | 22:03 | |
And second, what further happens to velocity | 22:06 | |
as a result of an expansion in which | 22:10 | |
deficit financing plays a large role? | 22:14 | |
In a cyclical expansion, | 22:19 | |
which typically is stimulated by a rise | 22:21 | |
in the rate of monetary growth at an earlier date | 22:25 | |
and after a lag the economy expands. | 22:28 | |
It is very typical that velocity rises | 22:31 | |
and rises fairly substantially during the expansion. | 22:35 | |
That is velocity is usually measured | 22:38 | |
which is to say current income divided by | 22:41 | |
the current money supply. | 22:44 | |
That is the experience that we have had in this past year | 22:46 | |
when the velocity M2 and M1 both of 'em have risen. | 22:50 | |
M1 for part of the time very rapidly | 22:56 | |
but that's a temporary aberration over the year as a whole. | 23:00 | |
Both M1 and M2 velocities have risen. | 23:05 | |
M1 by something perhaps like 6%, | 23:08 | |
M2 by two or by a much smaller amount. | 23:11 | |
That's fairly typical during an expansion. | 23:14 | |
Now, this expansion was distinguished by the fact | 23:19 | |
that deficit, government deficit spending | 23:22 | |
was much more important | 23:27 | |
than it ordinarily has been in other expansions. | 23:28 | |
But in my opinion, that did not have a major effect | 23:31 | |
on the increase in V. | 23:34 | |
V increased and as a result of V increasing, | 23:35 | |
total GNP or total dollar spending | 23:39 | |
was able to increase at a much faster rate | 23:42 | |
than did the money supply. | 23:46 | |
But now, the effect of government deficit financing, | 23:51 | |
was to bid away funds that would otherwise | 23:56 | |
have been bid away for purposes of houses, | 23:59 | |
for purposes of investment spending. | 24:04 | |
And once again, a distinctive feature of this expansion | 24:06 | |
is that consumption and government spending | 24:10 | |
played a much larger role in the expansion than usually | 24:13 | |
and investment and housing played a much smaller role. | 24:16 | |
In the process of bidding the funds away from other uses, | 24:20 | |
the interest rate was made somewhat higher | 24:24 | |
that it otherwise would have been. | 24:25 | |
But at this point, the argument is not | 24:27 | |
that a rise in interest rates would not increase velocity. | 24:30 | |
Of course it will and it does tend to. | 24:33 | |
But that the rise in interest rates | 24:35 | |
as a result of deficit spending | 24:38 | |
rather than private spending was not very substantial. | 24:40 | |
And the argument for that | 24:43 | |
is that the investment demand as it were | 24:45 | |
is highly elastic, highly sensitive to interest rates. | 24:48 | |
And it doesn't take much of a rise interest rates, | 24:51 | |
I shouldn't say a rise | 24:54 | |
because what we're always talking about | 24:56 | |
is interest rates being higher or lower | 24:59 | |
than they otherwise would be. | 25:01 | |
For example, in the past year | 25:02 | |
interest rates actually fell a little. | 25:03 | |
But they didn't come down to anything | 25:06 | |
like the levels that which they have been | 25:07 | |
during other expansions. | 25:09 | |
So that they were higher than they otherwise would be. | 25:10 | |
And in my opinion, it takes very little additional, | 25:13 | |
very little extra | 25:17 | |
rise in interest rates | 25:21 | |
or higher interest rates | 25:22 | |
to discourage investment spending. | 25:23 | |
And that's why I think you have | 25:25 | |
on the one had crowding out, | 25:27 | |
on the other you have a rise in velocity. | 25:29 | |
In the third place, you have higher interest rates | 25:32 | |
than you otherwise would but not much higher. | 25:35 | |
Now, the Father, Father Scherber asks | 25:38 | |
what is the | 25:41 | |
evidence behind that sentence. | 25:45 | |
The primary evidence behind that sentence | 25:48 | |
consists in empirical studies would show | 25:50 | |
that the relation between changes | 25:54 | |
in the quantity of money on the one hand | 25:56 | |
and changes in GNP or income on the other | 25:58 | |
depends very little if at all | 26:02 | |
on the source of the increase in the money supply. | 26:06 | |
If there were no crowding out, | 26:10 | |
then that would mean | 26:14 | |
that an increase in the money supply | 26:15 | |
that was accompanied by a large government deficit | 26:17 | |
should produce a much more rapid increase in GNP | 26:20 | |
than otherwise, that it would produce | 26:24 | |
a much more rapid increase in velocity | 26:27 | |
than would otherwise occur. | 26:29 | |
But, the various studies that have been made by many people, | 26:31 | |
not only for the United States but for other countries, | 26:34 | |
and I cannot of course give the details | 26:38 | |
of the evidence here. | 26:42 | |
But I interpret the bulk of that evidence as being | 26:43 | |
that the quantitative increase of the money supply | 26:47 | |
is more important for the subsequent increase in income | 26:51 | |
than is the way in which that money supply is increased. | 26:55 | |
Whether it's a result of financing private credit | 26:59 | |
or financing government credit. | 27:01 | |
And moreover, that the effect is little effected | 27:03 | |
by the contemporaneous sides of the government deficit. | 27:08 | |
That fiscal policy has an effect | 27:12 | |
but it seems to be a relatively small and unstable effect | 27:14 | |
compared to the effect of the growth of money. | 27:18 | |
Those are the main effect. | 27:20 | |
Now let me add, the one more sophisticated qualification | 27:22 | |
to all this which has been brought out | 27:25 | |
by a number students in recent years. | 27:28 | |
Notably by a former student of mine | 27:31 | |
by the name of Levis Coschan. | 27:33 | |
There is a striking relationship | 27:36 | |
between the rate of private saving on the one hand | 27:39 | |
and the level of government deficit spending on the other. | 27:42 | |
It looks almost as if you could | 27:48 | |
almost interpret the figures as saying | 27:50 | |
that when the government engages in deficit spending | 27:52 | |
the public at large recognizes | 27:55 | |
that this constitutes a claim on their future wealth | 27:58 | |
and is the exact equivalent of taxes. | 28:01 | |
And proceed to save in order to provide an advance | 28:04 | |
the funds that will be necessary later | 28:07 | |
to pay off this debt. | 28:09 | |
Now, I'm exaggerating because the magnitude of the saving | 28:11 | |
may not correspond to the magnitude of the deficit | 28:14 | |
but the effect is in that direction. | 28:16 | |
Now in so far as that effect existed, | 28:18 | |
then there would literally be no crowding out. | 28:22 | |
Because then a government deficit | 28:24 | |
would lead to an increase in private saving. | 28:27 | |
But at the same time while there would be | 28:30 | |
no crowding out of investment, | 28:32 | |
that would negate any expansionary effect | 28:34 | |
of the deficit per say | 28:38 | |
just as much as would the crowding out of investment. | 28:39 | |
So whichever of these lines you take, | 28:43 | |
the end result is that a government deficit | 28:46 | |
is not per say expansionary. | 28:49 | |
What is expansionary is the rate of change | 28:52 | |
of the quantity of money, | 28:54 | |
for a given rate of change in the quantity of money. | 28:56 | |
The effect of the government deficit | 28:58 | |
is either on private savings or on private investment. | 29:00 | |
- | That brings us to the end of our tape. | 29:05 |
Remember subscribers, if you have any questions or comments | 29:07 | |
please send them to Instructional Dynamics Incorporated, | 29:10 | |
450 East Ohio Street, Chicago, Illinois, 60611. | 29:14 | |
We should be visiting with you again | 29:20 | |
in about two weeks. | 29:21 |
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