Tape 10 - 1969 forecast amplification; decrease in growth rate of monetary supply
Loading the media player...
Transcript
Transcripts may contain inaccuracies.
- | Hello. | 0:02 |
Instructional Dynamics Incorporated welcomes you | 0:02 | |
to this weekly series of commentaries | 0:05 | |
on the current economic scene. | 0:07 | |
Reporting to you will be one of the the nation's | 0:09 | |
leading economists, Professor Milton Friedman | 0:11 | |
of the University of Chicago. | 0:13 | |
- | Got to the increase in the prime rate to seven percent. | 0:17 |
It's been widely heralded | 0:19 | |
as the strongly contractionary influence. | 0:20 | |
Does that affect your forecast in our last tape | 0:23 | |
that the first half of 1969 would be scrapped? | 0:25 | |
- | No, it doesn't. | 0:28 |
The increase in the prime rate is the consequence | 0:30 | |
of other forces, not a cause. | 0:35 | |
What's been happening is that you have had | 0:37 | |
a very expansionary economy. | 0:39 | |
The economy being so expansionary | 0:42 | |
it has increased the demand for loans. | 0:44 | |
The demand for loans being so high, | 0:46 | |
the banks have been hard put to it to satisfy that demand. | 0:49 | |
As a result, they had had to find some way | 0:52 | |
in which to ration the credit, | 0:55 | |
to ration the amount they could loan | 0:57 | |
to the customers who wanted it. | 1:00 | |
An increase in price is the obvious way | 1:02 | |
for free market to do it. | 1:04 | |
But I think that the rise in the prime rate to seven percent | 1:05 | |
is simply a sign that the demand has been very strong | 1:10 | |
and not at all in any way | 1:13 | |
in itself an independent force making for contraction. | 1:15 | |
Suppose a prime rate hadn't been raised, | 1:19 | |
given limited funds to lend out, | 1:22 | |
the banks would have had to choose | 1:23 | |
whom to lend it to in some other way. | 1:25 | |
They might have rationed it to favorite customers. | 1:26 | |
They might have given it to people who promised | 1:29 | |
a whole large deposits with it. | 1:31 | |
However they had rationed it out, | 1:32 | |
the amount of loans made available would've been the same. | 1:35 | |
The only difference would've been, who paid the price? | 1:38 | |
One point that interested me in the discussion of this event | 1:41 | |
came up in the course of an editorial in Wall Street Journal | 1:45 | |
which expressed essentially | 1:50 | |
the view I've been expressing now | 1:52 | |
that the increase in the prime rate was a consequence | 1:54 | |
of a strong demand for credit rather than a cost. | 1:57 | |
But in the course of that review, | 2:01 | |
it come at it that afterall, | 2:03 | |
the interest rate was a price of money, | 2:04 | |
and money being scarce in the sense | 2:07 | |
that there was a strong demand for it, | 2:10 | |
what else would you expect | 2:12 | |
but that the price of money would go up? | 2:14 | |
In this state, it seems to me to reflect | 2:16 | |
a major confusion in understanding | 2:18 | |
of monetary and credit affairs and financial affairs | 2:21 | |
because it embodies a basic confusion | 2:25 | |
that has plagued the Federal Reserve System | 2:29 | |
and other central banks for a long time, | 2:31 | |
namely the confusion between credit and money. | 2:34 | |
When people use the term money in the way in which | 2:39 | |
the Wall Street Journal was using it, | 2:43 | |
they weren't referring to money | 2:44 | |
in the sense of the pieces of paper | 2:46 | |
that we carry around in our pockets. | 2:48 | |
They were referring to the money in the sense of loans, | 2:50 | |
in the sense of credit. | 2:53 | |
And the interest rate is not the price of money, | 2:54 | |
it is the price of credit. | 2:57 | |
Credit is a very different thing from money. | 2:59 | |
Some credit does have a close relation to money | 3:01 | |
when a commercial bank makes a loan to an individual | 3:05 | |
and the counterpart to that on its books | 3:11 | |
is a deposit liability. | 3:13 | |
That deposit liability may in turn be transferred | 3:15 | |
from that bank to other banks. | 3:18 | |
That deposit liability is a money | 3:20 | |
which is a counterpart to credit. | 3:22 | |
However, much money has nothing to do with credit. | 3:24 | |
If we back to early days | 3:27 | |
when money was dug out to the ground | 3:29 | |
in the form of gold, it's obvious, it's the gold mine | 3:31 | |
and the flow of money from the gold mines | 3:34 | |
had little to do with credit. | 3:36 | |
Similarly, when money is credit by governments | 3:38 | |
to pay for their expenses as happened in this country | 3:40 | |
and to a greater extent in other countries, | 3:44 | |
that increase is a quality of money | 3:46 | |
but it does not have any effect on credit. | 3:48 | |
In the other side of the picture, | 3:50 | |
most credit is not generated through money. | 3:52 | |
It's not generated through commercial banks. | 3:55 | |
If you take a total volume of credit in this country, | 3:58 | |
what does it consist of? | 4:01 | |
It consists not only of bank loans. | 4:02 | |
It consists of trade credit, which is very large. | 4:04 | |
It consists of short term commercial paper | 4:07 | |
in the commercial paper market. | 4:10 | |
It consists of bonds, of stocks, of mortgages | 4:11 | |
and an enormously large volume of items, | 4:15 | |
very much larger in total. | 4:19 | |
And that part of a credit, which comes | 4:21 | |
from the Federal Reserve System | 4:24 | |
or even from the commercial banks at home. | 4:25 | |
So I would argue that interest rate | 4:28 | |
is a price of credit. | 4:31 | |
And what we saw in the market in the last few weeks | 4:33 | |
was a strong demand for credit, | 4:37 | |
the price of credit went up. | 4:39 | |
What is the price of money? | 4:41 | |
That's the other part of the picture. | 4:43 | |
The price of money are as a volume of goods and services | 4:44 | |
you have to give up to get some money. | 4:48 | |
In order for you to get a dollar, | 4:51 | |
you have to work a certain amount of time | 4:53 | |
or you have to sell a certain amount of goods. | 4:55 | |
That's the price of the dollar. | 4:57 | |
Or upside down, you might say | 5:00 | |
that the price level is the upside down, | 5:03 | |
the inverse of the price of money. | 5:07 | |
When money becomes plentiful, that is, | 5:10 | |
when you have an increase in the quantity of money | 5:12 | |
at a rapid rate, this tends | 5:14 | |
to lower the price of money, | 5:20 | |
just as an increase in wheat lowers the price of wheat. | 5:21 | |
An increase in the volume of copper | 5:25 | |
tends to lower the price of copper. | 5:27 | |
And similarly, if you have a rapid increase | 5:29 | |
in the quantity of money, | 5:30 | |
that tends to lower the price of money in the sense | 5:31 | |
that you have to have fewer goods and services | 5:34 | |
to buy you money, or put the other way around. | 5:36 | |
It raises the money price of goods and serves. | 5:39 | |
And it reduces the purchasing power of money. | 5:42 | |
That's what you mean by saying it lowers the price of money. | 5:45 | |
In this sense, I emphasize this because | 5:48 | |
I believe this confusion between money | 5:52 | |
and these two senses is a source of enormous confusion | 5:54 | |
about the factors that affect interest rates. | 6:00 | |
It is widely believed that if you have | 6:01 | |
"easy money policy", that as a Federal Reserve | 6:06 | |
is increasing the quantity of money rapidly, | 6:09 | |
that must mean low interest rates. | 6:11 | |
Why? | 6:13 | |
By this analogy that if you have a lot of money, | 6:14 | |
then the price of money must be low. | 6:17 | |
If interest rates are the price of money, | 6:18 | |
interest rates must be low. | 6:20 | |
But as the analysis I've just given makes clear | 6:21 | |
that isn't the right conclusion. | 6:24 | |
If you have a lot of money, then the cost of money, | 6:26 | |
the price of money in terms of goods will be low, | 6:29 | |
which means price level will go up, | 6:31 | |
but there is no reason in and of it selself. | 6:33 | |
Why that should make the price of credit low. | 6:35 | |
And in fact, you will note that our recent experience | 6:39 | |
is a very dramatic example of this. | 6:43 | |
The rise in the prime rate means a substantial rise, | 6:46 | |
is a reflection of a rising cost of credit | 6:49 | |
and it's going a long work, an enormous increase | 6:52 | |
or a very rapid increase in the rate of which | 6:55 | |
money is being created as I mentioned in my last day. | 6:57 | |
The quantity of money has been growing | 7:01 | |
at the rate of about over | 7:03 | |
11% to 12% per year for the past year. | 7:05 | |
If that rapid increase were to be lower in the price | 7:09 | |
of credit money in the sense of the interest rates, | 7:13 | |
you oughta have lower interest rates | 7:16 | |
and said, we have higher interest rates. | 7:17 | |
But what we do have of course is a lower price of money | 7:19 | |
in the terms of goods at higher price level. | 7:22 | |
While I'm talking about this subject , I think might | 7:25 | |
make one more point about the forecast | 7:27 | |
for this coming year. | 7:30 | |
It's a point in Mr. Samuelson made in his | 7:32 | |
interesting and extensive forecast discussion, | 7:36 | |
but I would like to underline than stress. | 7:40 | |
That point is that independently, | 7:42 | |
of the forecast about the level of GNP for the year 1969, | 7:46 | |
the kind of forecast I described in my last tape, | 7:52 | |
and that I believe to hold | 7:55 | |
is qualitatively very different | 7:57 | |
from the forecast | 8:00 | |
Profession Samuelson made so far | 8:03 | |
is a pattern over the year is concerned. | 8:06 | |
As he pointed out, his forecast was if anything | 8:08 | |
for a relatively slow first and second half, | 8:11 | |
and then a speed up in the rate of growth of the GNP | 8:14 | |
in the third and fourth, I'm sorry, | 8:17 | |
in the first and second quarters of the year. | 8:19 | |
Then a speed up in the GNP | 8:21 | |
in the third and fourth quarters of the year. | 8:23 | |
As I emphasized in my last tape, | 8:27 | |
those of us who would stress | 8:29 | |
the role of the quantity of money | 8:30 | |
must make a forecast in the opposite direction. | 8:32 | |
The quantity of money has been rising very rapidly | 8:35 | |
in the past six months. | 8:38 | |
That speaks, if anything, for a rapid rate of growth in GNP, | 8:39 | |
a continued inflationary pressure | 8:43 | |
in the first half of this year. | 8:45 | |
There are some signs that the Fed may be getting ready | 8:47 | |
to step on the brake | 8:50 | |
and to reduce the rate of monetary growth. | 8:51 | |
If they do so, if they produce the kind of credit crunch | 8:53 | |
that Professor Samuelson said was a real possibility | 8:57 | |
in the first six months of this year, | 9:00 | |
the effects of that on GNP and on spending | 9:02 | |
won't be felt til later in the year. | 9:05 | |
And that would produce a pattern of a very rapid increase | 9:08 | |
during the first half and slow down during the second half. | 9:11 | |
Now one point I want to emphasize to avoid misunderstanding, | 9:14 | |
when I talk about a lag of six months or so, | 9:18 | |
that is a lag between the actions of monetary authorities | 9:20 | |
on the quantity of money | 9:24 | |
and its effects on spending income prices and so on. | 9:26 | |
I am not talking about its effects on | 9:31 | |
bond markets or stock markets or money markets. | 9:33 | |
The kind of thing that goes under a money crunch. | 9:38 | |
That effect comes much earlier. | 9:40 | |
And if indeed there is a money crunch, | 9:42 | |
it will not, | 9:45 | |
if there is a money crunch which is going to produce | 9:47 | |
a slowdown in the second half of 1969, | 9:50 | |
it will have to come early in '69 rather than later. | 9:53 | |
- | I have here a newspaper story reporting | 9:56 |
on a recent commerce department news release. | 9:58 | |
According to the story, and I quote, | 10:00 | |
much of the dues powering the unexpectedly strong | 10:02 | |
showing of the GNP in the fourth quarter | 10:05 | |
comes from business spending for new plants and equipment. | 10:08 | |
Expenditures for housing, inventory investment | 10:12 | |
and outlays by state and local governments | 10:14 | |
are also running strong. | 10:16 | |
Would you comment on this? | 10:18 | |
- | That's a fascinating story | 10:20 |
because of course, as I've already implied, | 10:22 | |
while a strong showing of the GNP in the fourth quarter | 10:26 | |
was unexpected to the Commerce Department | 10:29 | |
and to the other commentators who expected | 10:32 | |
the surtax to slow down the economy, | 10:36 | |
it was not unexpected to those of us | 10:39 | |
who would put most weight on monetary change. | 10:41 | |
But the reason I find it fascinating | 10:44 | |
is a very different one. | 10:46 | |
This story stresses an increase in business spending | 10:48 | |
as if it was something to be explained, | 10:53 | |
as if it was an unusual phenomenon. | 10:54 | |
What fascinates me about it is that this pattern of spending | 10:58 | |
is precisely what should've been expected | 11:01 | |
from what I would regard as a correct analysis | 11:05 | |
of the impact of the surcharge | 11:10 | |
along with a rapid rate of monetary expenditure. | 11:13 | |
Let me see if I can make that more exclusive. | 11:17 | |
The increase in taxes, on the one hand, | 11:21 | |
reduce the income available to tax payers. | 11:25 | |
Most of whom, mostly, consumers. | 11:28 | |
It would not be surprising if that led | 11:31 | |
to a decline in their spending. | 11:34 | |
The reason why it nonetheless cannot be expected | 11:38 | |
to be contractionary is because | 11:41 | |
the other side of that picture is | 11:43 | |
if the tax surcharge reduce the amount, | 11:44 | |
which the federal government had to borrow | 11:47 | |
on the credit market, it took the pressure | 11:49 | |
off the credit market. | 11:51 | |
But what does that mean? | 11:53 | |
That means that there was a larger supply of funds | 11:55 | |
for other purposes than would've been available. | 11:58 | |
That means that the rates of interest | 12:02 | |
were lower than they otherwise would've been. | 12:04 | |
That means it was money available, funds available. | 12:07 | |
I'm getting into the same trap | 12:10 | |
of using money to mean credit | 12:12 | |
when I shouldn't be using it in that sense. | 12:14 | |
I should be using it to mean, | 12:15 | |
I should be using the term credit. | 12:18 | |
There were funds available or credit available | 12:20 | |
precisely for the business spending | 12:22 | |
for new plants and equipment, | 12:25 | |
precisely for the expenditures for housing and so on. | 12:26 | |
That the Commerce Department in that story | 12:30 | |
emphasizes as having unexpectedly as they say | 12:32 | |
produce a strong showing of the GNP on the fourth quarter. | 12:36 | |
To summarize, what one would've expected is | 12:40 | |
that a tax increase would tend to shift the composition | 12:43 | |
of spending, but not necessarily the order it's told. | 12:47 | |
It would tend to shift the composition of spending away | 12:51 | |
from spending by tax payers. | 12:54 | |
In this case, particularly on consumption | 12:59 | |
two spending of a kind | 13:01 | |
that would be particularly sensitive | 13:04 | |
to an increased availability of credit, | 13:06 | |
of loanable funds into a lower price | 13:10 | |
for those loanable funds. | 13:13 | |
And that is precisely what happened in this episode. | 13:14 | |
- | Doctor, do you feel recent action by the Federal | 13:17 |
raising short term interest rates | 13:19 | |
while not changing Regulation Q | 13:21 | |
that will cause a credit crunch? | 13:24 | |
If so, how much of the equation | 13:25 | |
the rate of growth of the monetary supply | 13:27 | |
do you feel they are looking for? | 13:29 | |
- | This ties in very much to the comment | 13:31 |
we've just been making. | 13:33 | |
The subscriber asks about recent action | 13:35 | |
by the Fed raising short term interest rates. | 13:38 | |
There has been no reason to action by the Fed | 13:40 | |
raising short term interest rates | 13:43 | |
other than the increase in the discount rate a while back. | 13:45 | |
That increase in the discount rate | 13:49 | |
was, as I've emphasized before, a belated reaction | 13:52 | |
to the rising market rates | 13:55 | |
and could not be expected to have much effect on anything. | 13:57 | |
Indeed, the increase in the discount rate | 14:01 | |
has been accompanied, for reasons | 14:05 | |
which I may say have very little to do with it, | 14:07 | |
while substantial rise in the amount of borrowing | 14:09 | |
by member banks from the Fed. | 14:13 | |
It's also been accompanied by a federal funds rate | 14:17 | |
that from time to time has got up | 14:19 | |
to something nearly seven percent, | 14:21 | |
six and half, six and three quarter percent, | 14:23 | |
and the federal funds rate being so much higher | 14:24 | |
than the discount rate suggests | 14:28 | |
that the discount rate has not been biting very much. | 14:29 | |
So I'm not sure that there has been any recent action | 14:34 | |
by the Fed raising short term interest rates | 14:37 | |
in the sense in which a subscriber means. | 14:39 | |
The recent action by the Fed in promoting | 14:42 | |
an acceleration of monetary expansion | 14:45 | |
has been raising all interest rates short and long, | 14:47 | |
as a result of a boom that has been developing. | 14:50 | |
However, the failure of the fed to change Regulation Q | 14:53 | |
can be expected to have significant monetary effects | 14:59 | |
because that means that it will be difficult for banks | 15:02 | |
to raise funds through CDs. | 15:04 | |
They will have to shift deposits from | 15:07 | |
time to demand deposits, | 15:10 | |
demand deposits have a higher reserve requirements on 'em. | 15:11 | |
This means that the given volume of reserve money | 15:14 | |
made available by the fed will tend to be | 15:18 | |
a more restrictive factor on the expansion of deposits. | 15:21 | |
The money supply by the commercial banks. | 15:27 | |
But I am particularly interested in the second half | 15:30 | |
of the subscriber's comment in which he says, | 15:33 | |
how much of a decrease in the rate of growth | 15:35 | |
of the monetary supply do you feel they are looking for? | 15:37 | |
Unfortunately, I don't believe they are looking | 15:41 | |
for one decrease or another. | 15:44 | |
Unfortunately, the major complaint I have had | 15:47 | |
about the Federal Reserve is that in guiding their policy, | 15:49 | |
they do not express it in terms of the rate of growth | 15:53 | |
of the money supply. | 15:55 | |
They have tended for long to control their policy | 15:57 | |
that guide their policy in terms of what they believe, | 16:00 | |
the effect to their policy is on interest rates. | 16:03 | |
If you look at their, | 16:06 | |
if you look at their directives, | 16:09 | |
the directives that are issued to the people | 16:10 | |
who operate the open market in New York, | 16:13 | |
these directives are always in terms | 16:15 | |
of keeping credit conditions either | 16:17 | |
about it as they are or making them a little tighter | 16:21 | |
or making them a little easier. | 16:24 | |
You will not find very much reference | 16:26 | |
in those directives to the money supply. | 16:28 | |
And time and again, they have stressed | 16:31 | |
that the Federal Reserve cannot look at a single number, | 16:35 | |
it cannot look just at the rate of growth | 16:37 | |
of the money supply. | 16:39 | |
It must look at everything that is going on. | 16:40 | |
It must take account of the effect of its actions | 16:42 | |
on the short term rate and on the long term rate | 16:44 | |
on the availability of credit, | 16:47 | |
on the possibility of the problems of the treasury | 16:49 | |
and floating bonds and so on. | 16:52 | |
As a result, I doubt very much | 16:54 | |
if you could get any expression from the Federal Reserve | 16:56 | |
of their policy, any statement of their policy | 16:59 | |
in terms of what's been happening | 17:02 | |
to the rate of growth of the money supply. | 17:03 | |
This is the real danger | 17:06 | |
because I believe the real danger is | 17:08 | |
that because they guide their policy | 17:11 | |
in terms of other criteria, | 17:13 | |
they may produce a much sharper decline | 17:16 | |
in the rate of growth of the money supply | 17:19 | |
than it would be good for the economy. | 17:20 | |
Or then they themselves, after the event, | 17:23 | |
will wish they had produced. | 17:25 | |
That certainly is the experience of earlier time. | 17:27 | |
That certainly is the experience of 1966 | 17:31 | |
of the credit crunch in this still earlier times. | 17:34 | |
The question might be, if they do tighten up, | 17:37 | |
what rate of decrease in the money supply | 17:41 | |
will they bring about? | 17:43 | |
That's a much harder question to answer. | 17:46 | |
The money supply, in the sense in which I've been | 17:48 | |
referring to, it is currency plus | 17:51 | |
all deposits of commercial banks | 17:53 | |
has been growing at the rate of about 12% per year. | 17:54 | |
A shift to something like four or five percent a year | 17:58 | |
would be a major shift. | 18:02 | |
That would bring a very real tightness | 18:04 | |
into the money market. | 18:07 | |
Because while, as I emphasized earlier, | 18:09 | |
money and credit are very different things, | 18:13 | |
I do not mean to deny for a moment | 18:17 | |
that what the Fed does on the monetary side | 18:20 | |
does have some both short term and long term effects | 18:22 | |
on the credit markets. | 18:25 | |
This is partly because in our system, | 18:27 | |
the Fed happens to operate through the credit markets. | 18:31 | |
When the Fed tightens really what it does | 18:34 | |
primarily is to sell government bonds on the open market. | 18:38 | |
By selling those government bonds, | 18:43 | |
bonds are paid for by deposits on banks. | 18:45 | |
These deposits are debited against the bank's balance | 18:50 | |
at the Reserve system and essentially are destroyed | 18:53 | |
as if you use currency to buy a bond | 18:56 | |
and the Fed then burned up the currency. | 18:59 | |
That's the way in which the Fed is able | 19:02 | |
to reduce the money supply. | 19:05 | |
But the process of doing that means | 19:07 | |
that it does by those bonds. | 19:08 | |
If it buys a bond, in order to buy 'em, | 19:11 | |
it has to bid up their price. | 19:13 | |
It has to change their price. | 19:15 | |
I'm sorry, I was talking about buying bonds. | 19:19 | |
That's when it expands. | 19:21 | |
I got myself confused. | 19:22 | |
Let me go back. | 19:24 | |
It sells the bonds to tighten it up. | 19:25 | |
It sells bonds in order to get the proceeds to burn out. | 19:27 | |
When it sells a bond, what does it do? | 19:30 | |
It drives down the price of a bond, | 19:32 | |
that means it drives up the interest rate, the yield. | 19:35 | |
It drives it up temporarily, in the process. | 19:37 | |
Similarly, the commercial banks | 19:42 | |
now find themselves trapped for funds | 19:46 | |
and the process whereby they reduce their deposits | 19:49 | |
is by calling loans or refusing to extend loans. | 19:52 | |
And that too tends to raise interest rates. | 19:56 | |
So in our system, I emphasize our system | 19:59 | |
because if we had a monetary system | 20:02 | |
in which the quantity of money | 20:04 | |
was being increased or decreased, | 20:05 | |
let us say by government passing out handouts | 20:07 | |
or imposing taxes on people and taking back the money. | 20:11 | |
Or by opening up gold mines or closing gold mines. | 20:15 | |
Under those kinds of a monetary system, | 20:18 | |
even as initial effect on the credit market | 20:20 | |
might not be felt. | 20:23 | |
But under our system, the process of changing | 20:24 | |
the quantity of money does have initial effects | 20:28 | |
on the credit markets. | 20:30 | |
These effects are, I say, temporary | 20:32 | |
because once the fed has decreased the quantity of money, | 20:36 | |
this tends to work its way through the system, | 20:41 | |
to lead to a reduction and total spending and total income | 20:44 | |
and thus after a time to a reduction | 20:47 | |
of the demand for loans which stands to lower interest rates | 20:50 | |
back to where they were before or still lower. | 20:54 | |
The temporary effect takes something like about six months, | 20:57 | |
and after that you go the other way. | 20:59 | |
So as I say, | 21:02 | |
if the Fed does in fact stay up on the tie on the brink, | 21:08 | |
if it does bring them right a monetary growth | 21:13 | |
from something like 12% down to something like 4%. | 21:15 | |
And the reason I take those numbers | 21:19 | |
is because that's about the magnitude of change | 21:20 | |
that the fed has produced in earlier periods | 21:23 | |
when it has stepped hard on the brake. | 21:26 | |
It will make such a change | 21:28 | |
that will have some significant effects | 21:30 | |
on the credit markets in the short run. | 21:32 | |
Its short run effects will be to | 21:34 | |
raise interest rates and make them somewhat tighter. | 21:37 | |
Perhaps I'm wrong in extrapolating | 21:41 | |
from Fed's past experience. | 21:43 | |
Perhaps this time, they will do what, | 21:45 | |
in my opinion would be the right thing, | 21:49 | |
which would be to look at the rate of growth to my supply | 21:51 | |
and to take taper it off. | 21:54 | |
My advice would be | 21:58 | |
not to go and one full step all the way from where we are | 22:02 | |
to where we would ultimately like to be. | 22:05 | |
But in order to avoid two severe shock to the economy, | 22:07 | |
do it in steps. | 22:11 | |
If the rate of growth of the money supply | 22:12 | |
is now something to be in the order of 11 to 12%, | 22:14 | |
if the ultimate rate of growth that I would like | 22:17 | |
as a long run matter would be in the order of about | 22:19 | |
five to six percent. | 22:22 | |
What I would like to see if the Fed moving | 22:24 | |
from 12 to something like eight or nine | 22:26 | |
for a period of three, four, five, six months, | 22:29 | |
and then moving gradually, maybe to seven | 22:31 | |
and then down to six. | 22:34 | |
And then holding it there. | 22:35 | |
And thus giving the economy time to adjust to it. | 22:36 | |
But I have no confidence whatsoever | 22:40 | |
that the Fed will follow this policy. | 22:42 | |
I think they are more likely to follow the policy | 22:44 | |
that they have always in the past | 22:46 | |
of stepping on the brake too hard. | 22:48 | |
Whenever I have said this to people, | 22:50 | |
I have time and again been asked the question, | 22:52 | |
but surely, the Fed must be learning. | 22:55 | |
Aren't they getting the message? | 22:56 | |
Afterall, you and other people like you | 22:59 | |
have been criticizing them precisely along these lines | 23:00 | |
for a long time. | 23:03 | |
Many people have found your criticisms effective | 23:05 | |
because the experience seemed to be in conformity | 23:08 | |
with what you have been saying. | 23:12 | |
Surely, the fed must also | 23:14 | |
and they're getting the message. | 23:17 | |
I wish I could believe that. | 23:19 | |
The people of the Fed are extremely abled people. | 23:21 | |
I have no question about either their ability | 23:23 | |
or their integrity or their desire to do the right thing. | 23:26 | |
They also would like to have a slow down in inflation | 23:30 | |
into avoid instability. | 23:32 | |
But the difficultly is that there is no great incentive, | 23:35 | |
no great force leading them | 23:40 | |
to adapt their opinions to the way that the evidence. | 23:45 | |
If any private business, being run for profit, | 23:49 | |
had followed a policy which diverged as much | 23:54 | |
from the actual facts as a Fed policy had, | 23:58 | |
if it had promised its stockholders | 24:00 | |
as much as a Fed has promised the world | 24:04 | |
and performed so far away from that promise, | 24:08 | |
the people around that enterprise | 24:12 | |
would be out of a job. | 24:13 | |
They would be bankrupt. | 24:16 | |
Of course, if not bankrupt, | 24:18 | |
somebody would've made a takeover a bit | 24:19 | |
and taken over the enterprise | 24:22 | |
and so we're on a new track. | 24:23 | |
As a result, I have always been impressed by the fact | 24:26 | |
that people who are in competitive businesses | 24:28 | |
are very much more open-minded, | 24:31 | |
very much more ready to change their opinion, | 24:34 | |
to listen to adverse evidence. | 24:35 | |
And are either government officials on the one hand | 24:38 | |
or my colleagues, college professors on the other, | 24:40 | |
if I may be unfaithful to my tribe. | 24:43 | |
The different is, precisely the one I've sided, | 24:47 | |
if a college professor gets up before his class | 24:51 | |
and says the wrong thing 40 years in a row, | 24:53 | |
there's a little incentive on him. | 24:56 | |
He doesn't lose any pay. | 24:58 | |
His students maybe less misinstructed | 25:01 | |
but he isn't gonna get bankrupt. | 25:04 | |
He isn't going to be driven out by irate stockholders. | 25:06 | |
If the Federal Reserve System makes a mistake, | 25:09 | |
they have control over the press releases, | 25:13 | |
they will blame it on | 25:16 | |
the malpractice, misbehavior, | 25:17 | |
greedy businessman or grasping labor leaders | 25:23 | |
or bad fiscal policy or something of this sort. | 25:28 | |
And there is no force that is sat in motion | 25:32 | |
by their mistakes, which in any way, | 25:36 | |
establishes a pressure on to adjust and to adapt. | 25:39 | |
And there's nothing harder in the world | 25:43 | |
than for anybody, you or I | 25:46 | |
are no different from others. | 25:48 | |
There's nothing harder in the world | 25:49 | |
than for us to admit that we've been wrong | 25:51 | |
and somebody else has been right. | 25:53 | |
And that is why you find over and over again | 25:55 | |
in administrative organizations | 25:59 | |
that once a mistake in policy has been made, | 26:01 | |
it is extremely difficult to get that mistake rectified, | 26:04 | |
to get it I changed. | 26:08 | |
This is true not merely in monetary affairs. | 26:10 | |
Look at the most obvious example. | 26:12 | |
Was in Robert Mcnamara's Guidance of the Defense department. | 26:16 | |
Once he committed himself to what was originally known | 26:23 | |
as the TFX F-111, the fighter plane | 26:27 | |
that was going to be a joint fighter plane | 26:32 | |
for the army in the Navy and the Air Force, | 26:33 | |
for the Air Force and the Navy and whatnot. | 26:35 | |
He was stuck. | 26:39 | |
If he had known before he made that commitment | 26:40 | |
what came out later about the problems | 26:43 | |
that were going to arise about the costs, | 26:45 | |
there isn't a slightest doubt that he never | 26:47 | |
would've engaged in the venture. | 26:48 | |
But once he publicly committed himself to the venture, | 26:50 | |
it was almost impossible for him to back down. | 26:53 | |
Exactly the same thing in my opinion is true. | 26:56 | |
The people on the Fed, | 26:58 | |
there's the reason why I have so little confidence, | 27:00 | |
that they have gotten the message | 27:03 | |
and are in fact going to honor their policy | 27:05 | |
in the way in which I was suggesting. | 27:07 | |
This is Dr. Friedman reporting. | 27:09 | |
- | Thank you, sir. | 27:13 |
If you have questions or comments | 27:14 | |
or suggestions for topics you would like discussed | 27:16 | |
in this series, please send them to | 27:18 | |
Instructional Dynamics Incorporated, | 27:20 | |
166 East Superior Street, Chicago 60611. | 27:23 |
Item Info
The preservation of the Duke University Libraries Digital Collections and the Duke Digital Repository programs are supported in part by the Lowell and Eileen Aptman Digital Preservation Fund