Tape 121 - Gold and the Dollar, Stock Market, Wage and Price Controls
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- | Hello, this is Rose Friedman, inviting you | 0:02 |
on behalf of Instructional Dynamics to another | 0:04 | |
of our bi-weekly interviews with Milton Friedman, | 0:07 | |
professor of economics at the University of Chicago. | 0:10 | |
We are taping this interview on May 24th, 1973. | 0:13 | |
One of the big items in the news these days, | 0:18 | |
outside of Watergate, and I'm not sure it's not related, | 0:21 | |
is gold and the dollar. | 0:24 | |
- | It certainly is very much in the news, | 0:26 |
the run up on the price of gold is amazing, | 0:28 | |
you've had gold go up to a level which is roughly | 0:33 | |
three times the so-called official price of gold. | 0:38 | |
You've have a rise in the price of gold over a short period, | 0:42 | |
which puts to shame such volatile | 0:45 | |
commodities as soybeans and pork belly. | 0:47 | |
The thing that is fascinating about the gold episode | 0:52 | |
and the associated talk about an attack on the dollar, | 0:56 | |
is the extent to which illustrates that old dictum | 1:01 | |
about generals fighting the last war. | 1:04 | |
Just as generals are always fighting the last war, | 1:07 | |
so it seems financial journalists and commentators | 1:10 | |
in commenting on international monetary affairs, | 1:14 | |
are also fighting the last war. | 1:17 | |
The comments that had been widespread | 1:19 | |
would make, would have made a good deal of sense | 1:25 | |
if this episode were occurring under the rules | 1:27 | |
that prevailed before the two tier system | 1:30 | |
was established early in 1968. | 1:33 | |
At the time when the U.S. was committed | 1:36 | |
to keeping the price of gold pegged at an official rate, | 1:38 | |
then that was $35 an ounce, | 1:43 | |
was committed to buying gold at that price if offered, | 1:45 | |
of selling gold at that price if demanded. | 1:49 | |
A great, an attempt to get into gold | 1:52 | |
in a bull market in gold, | 1:55 | |
had very serious monetary consequences, | 1:58 | |
both internally and internationally, because under such | 2:02 | |
circumstances, an attempt to get into gold | 2:05 | |
required the United States to provide it, | 2:07 | |
threatened the ability of the U.S. to maintain | 2:10 | |
that price, for very long, and threatened to set off | 2:14 | |
disruptive changes in exchange rates in | 2:19 | |
the system of currency and so on. | 2:22 | |
But fortunately, we are not in that situation today. | 2:24 | |
The world is in a wholly different situation, | 2:28 | |
gold is a commodity, it is a soybean. | 2:31 | |
A glamorous, glittering soybean. | 2:34 | |
The ups and downs in the price of gold | 2:38 | |
the large rises that have occurred, | 2:41 | |
the declines which will occur, | 2:43 | |
are not, and I underline not, as widely reported | 2:47 | |
in the paper, evidence of the virtues of gold as money, | 2:51 | |
evidence of a lack of confidence in other kinds of money, | 2:55 | |
evidence that you may have gold resume a place in the | 2:58 | |
international monetary system. | 3:02 | |
Quite to the contrary, what they tell us, | 3:04 | |
what they do is to undermine and destroy | 3:09 | |
the possibility of using gold as an international money. | 3:12 | |
Who wants to have as a money a commodity whose price, | 3:17 | |
relative to other prices, fluctuates enormously? | 3:20 | |
Would anybody dream that soybeans would be a stable | 3:24 | |
reservoir of purchasing power? | 3:27 | |
That if you wanted to hold some wealth for some time, | 3:30 | |
you ought to hold it in soybeans, given that soybean | 3:33 | |
prices can go up 10% over the course of a month or down 10%? | 3:35 | |
Similarly, now that gold has become a highly speculative | 3:39 | |
commodity, with a volatile run up in price, | 3:43 | |
that is likely as this develops because, of course, | 3:49 | |
if it were all one way, it would be a different thing, | 3:53 | |
but it isn't going to be all one way. | 3:55 | |
This bubble will collapse. | 3:57 | |
I don't mean to say that the price of gold | 3:59 | |
will not rise over a long period of time, | 4:02 | |
as subscribers know, I have said over and over again, | 4:04 | |
that I expect that the long run price trend | 4:07 | |
in the price of gold to be upwards, | 4:10 | |
just because it is a commodity. | 4:12 | |
However, this run up in the last month or two, | 4:15 | |
is clearly a bubble, not a reflection | 4:20 | |
of the long-term trend, I shall be amazed | 4:23 | |
if sometime in the next year you don't | 4:26 | |
have a collapse of the bubble, and when that happens | 4:27 | |
it will put another nail in the coffin | 4:30 | |
of gold as a basis of international money. | 4:34 | |
Linked with this, is the question of | 4:40 | |
what effect does the gold run have on the dollar? | 4:42 | |
The newspaper commentary has all interpreted | 4:46 | |
the gold bull market as a sign of weakening | 4:49 | |
confidence in the dollar, and as a threat, | 4:54 | |
somehow or other, to the maintenance of the dollar. | 4:56 | |
Again, this makes sense five or six years ago, | 4:59 | |
it makes no sense whatsoever now. | 5:03 | |
Under the earlier arrangements, somebody who bought gold | 5:06 | |
for dollars, that is to say, | 5:09 | |
bought gold from the U.S. treasury, | 5:11 | |
reduced the total amount of dollars available. | 5:14 | |
The dollars went into the hands of the treasury, | 5:17 | |
which didn't have to reissue them. | 5:19 | |
But today, if Mr. X buys gold, whom does he buy it from? | 5:21 | |
He buys it from somebody else. | 5:25 | |
If he pays over dollars, Mr. Y has the dollars. | 5:27 | |
The transactions in the gold market, | 5:30 | |
just like the transactions in the stock market, | 5:33 | |
do not, in any meaningful sense, absorb dollars, | 5:36 | |
do not enable people to get out of dollars, | 5:40 | |
do no enable people to get into dollars. | 5:41 | |
What they do is to shift dollars from one hand to another. | 5:44 | |
What the gold market reflects is a belief | 5:48 | |
that the price of gold is going to be higher. | 5:51 | |
The other interesting thing about this recent uproar | 5:54 | |
in the international currency market, | 5:59 | |
is that it is a marvelous testimonial | 6:01 | |
to the virtues of floating exchange rates. | 6:03 | |
Here you have had all this talk about | 6:07 | |
international crises and turmoil, I have for example, | 6:09 | |
a quotation right here from the | 6:14 | |
Chase Manhattan International Finance Publication | 6:17 | |
of May 21st 1973. | 6:19 | |
Earlier in the week it says, | 6:22 | |
the dollar came under intense pressure | 6:23 | |
in the foreign exchange market. | 6:25 | |
With virtually all major world currencies | 6:28 | |
recording sharp gains in their dollar value. | 6:30 | |
Well, then you go on to the next sentence. | 6:33 | |
The pound sterling for example at one point, | 6:36 | |
almost reached the 258 level, | 6:38 | |
a gain of about 3% in three days. | 6:41 | |
Now, 3% is not negligible, | 6:44 | |
but you compare what has been going on in the currency | 6:46 | |
markets now with what went on in the crisis in February. | 6:49 | |
What went on in earlier crises when you had | 6:53 | |
fixed exchange rates, if you were now operating | 6:56 | |
under those arrangements, what the newspaper headlines | 6:58 | |
would be saying would be that German Central Bank | 7:01 | |
takes in six billion dollars in two days. | 7:05 | |
The newspapers would be saying | 7:09 | |
hectic meetings at world central bankers involved to | 7:11 | |
determine what to do about the | 7:14 | |
international monetary system. | 7:16 | |
You haven't seen any such headlines. | 7:17 | |
The unfortunate central bankers haven't even gotten | 7:19 | |
a decent trip out of this whole controversy. | 7:22 | |
I shouldn't say controversy. | 7:27 | |
Out of this whole turmoil in the market. | 7:28 | |
On the contrary the markets have taken it in stride, | 7:30 | |
prices of the dollar in terms of some other currencies | 7:33 | |
has gone down a little, one, two, 3%, | 7:36 | |
it's now started back up again. | 7:38 | |
On the whole, I believe that the dollar today | 7:41 | |
is probably under valued rather over valued. | 7:44 | |
Probably the dollar will appreciate again | 7:48 | |
to other currencies, but it doesn't matter | 7:50 | |
whether I'm right or wrong, and indeed, | 7:51 | |
the great virtue of the present system, | 7:53 | |
is that nobody has to make such judgements, | 7:55 | |
except for individuals who are risking their own money, | 7:57 | |
and deciding whether they are going to | 8:00 | |
bet on a rise or a fall in the price of the dollar. | 8:02 | |
So I would say that this is a very excellent, | 8:05 | |
and very favorable test, for the kind of system of | 8:11 | |
international monetary arrangements that we've drifted into. | 8:16 | |
- | One of our subscribers, Arthur Merrill, | 8:19 |
wrote recently suggesting that perhaps | 8:23 | |
one of the economic developments to anticipate | 8:26 | |
might be the sudden demonetization of gold, | 8:30 | |
that is, an announcement that we, with or without | 8:33 | |
our economic allies have decided to liquidate our | 8:36 | |
gold stock by a combination of open market sales | 8:39 | |
and a series of sealed bids. What do you think of that? | 8:42 | |
- | Needless to say, I think it | 8:46 |
would be an excellent thing, as my subscribers may recall, | 8:47 | |
as long ago as in a book that I published in 1962, | 8:51 | |
and earlier than that I may say I recommended that | 8:56 | |
the U.S. should get out of the business of holding gold | 8:59 | |
by holding a series of five annual auctions, | 9:01 | |
and in each one auctioning off 20% of our gold stock. | 9:04 | |
We have, in effect, done that to a considerable extent | 9:08 | |
in the sense that our gold stock right now is half | 9:11 | |
of what it was at that time, | 9:14 | |
so we've gone halfway to auctioning it off. | 9:15 | |
Unfortunately, we sold it at low prices rather than at the | 9:18 | |
high prices we might have gotten. | 9:21 | |
But as to whether this is likely to happen here | 9:23 | |
I think the answer to that is not an easy one to give. | 9:26 | |
I doubt very much that the U.S. will do it on its own. | 9:31 | |
It will not do it on its own because that would be | 9:35 | |
widely interpreted by other governments as an | 9:37 | |
unfriendly, uncooperative act | 9:40 | |
in international economic arrangements, and with all | 9:42 | |
of the international economic negotiations | 9:45 | |
that are coming up, | 9:47 | |
it would be very short sighted for us to do it. | 9:48 | |
On the other hand, I suspect that the U.S. | 9:50 | |
would not be adverse to doing it in cooperation | 9:53 | |
with other central banks, and I believe the pressure | 9:57 | |
on other central banks to do it | 10:00 | |
is going to be very considerable. | 10:01 | |
Here they are sitting with the frozen assets of gold, | 10:04 | |
which they are permitted to value on their books only at | 10:07 | |
something like $42 an ounce, | 10:09 | |
and then selling in the world market | 10:11 | |
for a 110, $120 an ounce, | 10:12 | |
there is a strong temptation to | 10:15 | |
realize some of those profits. | 10:17 | |
I would expect that the first people to break the | 10:19 | |
central bank agreement not to | 10:23 | |
sell gold on the private market | 10:24 | |
would be likely to be some of the smaller | 10:26 | |
central banks from some of the smaller countries, | 10:28 | |
rather than the major central bankers such as | 10:32 | |
France, Germany, Japan. | 10:34 | |
But, that may not be so. | 10:37 | |
And I would not be surprised sometime in the next | 10:38 | |
year or so to see sales by central banks on a concerted | 10:41 | |
basis with an agreement among them to do it. | 10:45 | |
I do not believe it will occur as a | 10:47 | |
single dramatic announcement by the U.S. | 10:49 | |
- | Another element in our economy that's | 10:52 |
causing jitters all around is the stock market. | 10:54 | |
- | And with justice, the stock market is incredibly low. | 10:59 |
I have emphasized on these tapes the | 11:03 | |
extent to which the indexes that people look at are | 11:05 | |
misleading by reason of not allowing for either | 11:08 | |
price inflation on the one hand, | 11:13 | |
or the reinvestment of earnings on the other. | 11:15 | |
If you adjust for these two things in the level | 11:18 | |
of the Dow Jones Average, the level which was reached | 11:21 | |
a couple of days ago, as I speak, the market | 11:24 | |
has been up trivially for two days. | 11:28 | |
It is appreciably below the 630 level it was | 11:31 | |
reached at the trough of the stock market in 1970. | 11:38 | |
So that the market today is extraordinarily low | 11:49 | |
by past standards, especially when you allow for the fact | 11:53 | |
that we are in the midst of a tremendous boom, | 11:57 | |
if you allow for the fact that corporate earnings | 12:00 | |
in the first quarter of this year surpassed all | 12:02 | |
corporate profit, surpassed expectations, rose by | 12:05 | |
considerably more than anybody had been forecasting, | 12:07 | |
if you allow for the fact that interest rates, | 12:11 | |
long term interest rates, have been amazingly stable... | 12:13 | |
Considering the forecasts made last year throughout | 12:16 | |
the financial markets, it was expected that by this time | 12:20 | |
long term rates would be at one or two | 12:23 | |
percentage points above where they are now. | 12:25 | |
If you allow for the fact that while inflation | 12:28 | |
has been stepping up at an enormous rate, | 12:31 | |
there is little evidence of it in the behavioral wages. | 12:34 | |
On the contrary, wage rates have been extraordinarily, | 12:38 | |
uh, the rate of rise of wage rates | 12:42 | |
has been extraordinarily moderate. | 12:43 | |
So if you look at all of these things together, | 12:45 | |
the implication would be that the stock market should | 12:47 | |
be at an all time high, not at a well, at something | 12:50 | |
not an all time low, but a low for many years. | 12:55 | |
Now, many explanations have been offered by, | 12:59 | |
for this, and one I want to mention here, | 13:01 | |
because it's just come to my attention in this way recently, | 13:05 | |
is the argument that a major factor explaining | 13:09 | |
the low stock market is limitations of so-called | 13:12 | |
voluntary limitations of on corporate dividends. | 13:17 | |
As you know, there is a committee on interest in dividends, | 13:21 | |
which is chaired by Arthur Burns, | 13:24 | |
the chairman of the Federal Reserve System, | 13:27 | |
which has asked corporations to | 13:30 | |
limit increases in dividends to 4% per year. | 13:35 | |
This request has been honored | 13:39 | |
very, very widely, hardly anybody has differed. | 13:41 | |
I may say, entirely aside from whatever | 13:44 | |
economic effects it has, I think that kind of a situation is | 13:46 | |
disgraceful and intolerable, and it involves | 13:50 | |
extra legal activity that fundamentally the reason why | 13:53 | |
people have conformed to it, is not simply out of patriotism | 13:56 | |
but because they are afraid that if they do not, | 14:02 | |
they are going to be subject of all sorts of reprisals, | 14:04 | |
that their requested government agencies will not | 14:08 | |
receive proper attention, that they will be subject to | 14:11 | |
income tax, searches, and the like. | 14:13 | |
And on those grounds, I think that this is a kind of | 14:16 | |
troll that is even worse from a political point of view | 14:18 | |
than indefinite, legally enacted controls. | 14:22 | |
I am opposed to any restraints on interest and dividends, | 14:26 | |
as I am to any restraints on prices, | 14:29 | |
but if they are going to occur, I think they | 14:30 | |
ought to be imposed by legal measures, | 14:32 | |
and not by this kind of arm-twisting procedure. | 14:35 | |
At any rate, it has been highly effective, | 14:39 | |
and now say some people, why do people buy stocks? | 14:41 | |
They buy it for the income that they can get for it, | 14:45 | |
from it, that income in its distributed | 14:48 | |
form takes a form of dividends. | 14:50 | |
If dividends are restricted to a rise of 4% per year, | 14:53 | |
if in fact dividends are as they have been | 15:00 | |
something like 3% of market price, doesn't that mean | 15:04 | |
that rate of return on stocks is limited then? | 15:09 | |
Doesn't that mean that the rise in the price of stocks | 15:13 | |
is also going to be limited | 15:16 | |
to something like 4% a year, to a net return of 7%? | 15:17 | |
Which is not very attractive compared to the return | 15:20 | |
that can be earned tax-free on municipals. | 15:24 | |
or the return that can be earned on corporate security. | 15:28 | |
Why buy stocks for a 7% return? | 15:31 | |
There is no doubt that the dividend | 15:34 | |
limitation works in this direction. | 15:36 | |
Question is, whether it is of sufficiently | 15:40 | |
large magnitude to account for | 15:43 | |
the extremely depressed stock market. | 15:46 | |
My own intuition is that it is not. | 15:48 | |
Of course, people will say, well, so long as | 15:51 | |
the dividend limitation is temporary, there's no problem. | 15:54 | |
But who knows, temporary things have a way | 15:57 | |
of turning into something permanent. | 16:01 | |
People you may answer to that, well look at stocks. | 16:04 | |
The stocks that are doing best are | 16:07 | |
after all, the stocks that are paying no dividends at all. | 16:09 | |
All of which is involved in plowing back earnings. | 16:11 | |
And one answer to that would be | 16:15 | |
Yes, that doesn't add proof of point. | 16:17 | |
Those are stocks which are being bought by people | 16:19 | |
who are buying stocks solely for capital gains | 16:21 | |
and not for dividends at all, and those are | 16:23 | |
stocks and companies that are likely to have | 16:26 | |
very strong earning trends and are likely to be able | 16:28 | |
to outlast the dividend limitations. | 16:30 | |
And indeed eventually, to distribute the earnings | 16:33 | |
by way of some kind of liquidation. | 16:38 | |
If you were really to keep the dividend limitation | 16:40 | |
on indefinitely, there is no doubt what it would do. | 16:42 | |
It would mean that, sooner or later, the sensible thing | 16:44 | |
to do would be liquidate enterprises as the only way | 16:47 | |
of getting the money back to the people who own the stock. | 16:50 | |
At any rate, we do not have any definite evidence | 16:53 | |
that this dividend limitation is like, | 16:58 | |
is the major factor which is responsible for the low prices. | 17:01 | |
And my intuition is that it isn't important enough. | 17:05 | |
But whether I'm right or wrong, I was interested in, | 17:07 | |
I have been interested in noting that this view | 17:09 | |
has gotten, has found its way down to Washington. | 17:12 | |
That there is considerable discussion in Washington | 17:15 | |
about what may happen to the dividend limitations, | 17:17 | |
and I would not be surprised to see | 17:19 | |
a fairly substantial change in the dividend limitation | 17:21 | |
sometime in the next month or so. | 17:25 | |
But the discussion of permanent and temporary | 17:29 | |
raises, I believe, another aspect of society | 17:31 | |
which may be an important factor in explaining | 17:35 | |
why the stock market is so depressed as it has. | 17:38 | |
Quite a number of commentators, most recently | 17:41 | |
I read a piece by Alan Greenspan which emphasizes | 17:43 | |
and have been arguing that the major factor accounting | 17:46 | |
for the depressed state of the stock market is | 17:50 | |
a high degree of uncertainty on the part of investors | 17:52 | |
about what the nature of the economy is going to be | 17:55 | |
in the short run, about whether we're headed in for | 17:57 | |
a higher inflation, whether we're | 17:59 | |
headed in for a recession or not. | 18:01 | |
That resolving that uncertainty, even though it would | 18:04 | |
be in the direction of a recession, would be | 18:07 | |
a favorable thing for the market. | 18:09 | |
I wonder whether insofar if this is correct, | 18:12 | |
there is not a deeper, and a more | 18:14 | |
fundamental source of uncertainty. | 18:17 | |
Namely, the uncertainty about the kind of | 18:19 | |
an economics system under which we are going | 18:23 | |
to be operating over the next 5, or 10, 15, 20 years. | 18:25 | |
The emerg- uh, the introduction of wage and price controls | 18:29 | |
in 1971 during peace time represented | 18:33 | |
a drastic change with our traditions. | 18:36 | |
It is now widely taken for granted | 18:39 | |
that wage and price controls are a standard element | 18:42 | |
in the armory of governmental policy, and will | 18:45 | |
be enact- will be introduced, if not in the next year, | 18:48 | |
three years from now, if not then, five years from now. | 18:52 | |
The experience that Britain is striking in this | 18:55 | |
respect, the Heath government that came in | 18:57 | |
determined not to use wage and price controls again, | 18:59 | |
felt itself forced to do it after it made the great mistake | 19:02 | |
of turning on the monetary steam to avoid, in response to, | 19:07 | |
what can only be described as shock, | 19:13 | |
at having had unemployment reach a million. | 19:16 | |
So that I would give a good deal more credence to the view | 19:20 | |
that this fundamental uncertainty about the kind | 19:24 | |
of an economic system that we are going to be operating in, | 19:27 | |
about the extent to which business | 19:30 | |
will be able to maximize its returns, | 19:32 | |
may play a much larger role in the present | 19:35 | |
depressed state of the stock market, | 19:38 | |
than uncertainty about the short-run course of events | 19:41 | |
or then the dividends limitations proper. | 19:44 | |
- | While you're on the subject | 19:47 |
of wage and price controls, what do you think of | 19:48 | |
the chances that we may be in for more | 19:51 | |
and stricter controls in the near future? | 19:53 | |
- | Well, I hate to say it, | 19:56 |
but I am afraid they are not negligible. | 19:58 | |
We start, you started with commenting on Watergate, | 20:00 | |
and I think Watergate enters in very strongly into this. | 20:04 | |
There is enormous pressure on the President to | 20:07 | |
try to do something to redeem his political stock, | 20:10 | |
to replace his very, very much diminished cap. | 20:14 | |
The President has a temperament which leads him | 20:19 | |
to want to do something dramatic for that purpose. | 20:23 | |
Now, next couple of weeks, you have the Russians coming. | 20:26 | |
That may push the Watergate off the front pages, | 20:30 | |
but it will be very tempting for the president, | 20:33 | |
and I may say there's very strong pressure on him | 20:36 | |
from all sources, to try to get political kudo | 20:38 | |
by imposing controls as a way of doing something | 20:44 | |
about the extraordinary rates of inflation. | 20:48 | |
Will he do it? | 20:54 | |
Will he resist the temptation? | 20:55 | |
I do not know. | 20:57 | |
Clearly, there are strong voices | 20:58 | |
within the administration, notably the voice | 21:00 | |
of George Schultz, urging, moving a continuance | 21:02 | |
of a moving towards an elimination of controls. | 21:08 | |
But there are other voices, and the newspaper rumor | 21:12 | |
has it that John Connolly is one of them. | 21:16 | |
Urging a replay of August 1971. | 21:19 | |
In August 1971, Mr. Nixon unquestionably | 21:23 | |
got short-term political advantage by announcing a freeze. | 21:26 | |
He may feel that that is the only | 21:31 | |
effective tactic left to him now. | 21:34 | |
So that I must say, I would not bet more than even money | 21:37 | |
that you will avoid such more extensive price and wage | 21:41 | |
control in the very near future, and tying into | 21:45 | |
what I was saying earlier, even if you do avoid it, | 21:49 | |
I would give, I would, you would have to give me odds | 21:52 | |
to get me to bet that we will not have further | 21:56 | |
episodes of extensive price and wage | 21:58 | |
control over the next five years. | 22:01 | |
Every single time we get into a period of inflation, | 22:03 | |
the pressure to go this way will be tremendous. | 22:06 | |
Nothing, I think, has done more harm | 22:08 | |
as a result of the imposition of controls | 22:13 | |
in the summer of 1971, than the extent to which it is, | 22:16 | |
on the one hand, miseducated the public, | 22:19 | |
and on the other hand introduced price and wage | 22:22 | |
control as a permanent weapon in | 22:25 | |
the armory of economic policy measures. | 22:30 | |
- | I'm afraid we've come to | 22:33 |
the end of our time again. | 22:34 | |
Thank you very much. | 22:35 | |
Remember subscribers, if you have any | 22:36 | |
questions or comments, please send them to | 22:38 | |
Instructional Dynamics Incorporated, | 22:41 | |
166 East Superior Street, Chicago, Illinois, 60611. | 22:43 | |
We shall be visiting with you again in two weeks. | 22:50 |
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