Tape 65 - Monetary Developments, Depreciation Liberalization, Steel Prices

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-	Hello this is William Clark	0:02
	of the Chicago Tribune welcoming you once again on behalf	0:03
	of Instructional Dynamics Incorporated to a visit	0:07
	with the Eminent Economist Professor Milton Friedman	0:10
	of the University of Chicago.	0:12
	And Milton, I'd like to say what a pleasure	0:14
	it is for me to be back enjoying	0:16
	these visits with you for awhile.	0:18
-	I'm glad to have you back, Bill.	0:20
	The shift back to Bill signifies the fact that I've come	0:22
	from Vermont where I spend six months a year back to Chicago	0:25
	where I spend the other six months and I'm very glad	0:28
	to have Bill as my interlocutor.	0:31
-	(laughing) Well, thank you.	0:33
	I'm sure you'll enjoy your time in Vermont.	0:35
	We're glad to have you back in Chicago for a few months now.	0:37
	Milton, I wonder if you would bring me	0:40
	and bring your subscribers up to date	0:42
	on what's been happening with the monetary figures.	0:44
-	Yes, the last time I reported on the monetary figures	0:48
	was about a month ago and in one sense	0:50
	there isn't much change from that time to this.	0:52
	But in another sense,	0:55
	there are some rather interesting developments.	0:56
	As of now we have figures extending through the end	1:00
	of 1970, that is through the last week of December 1970.	1:04
	And one way to get some background	1:09
	is to look at the year as a whole.	1:12
	If we look at the year 1970 as a whole, we will find	1:17
	that the currency plus demand deposits	1:21
	M1 the narrow money supply has during that period	1:25
	risen at the annual rate of 5.4%.	1:28
	You will recall that on the whole	1:31
	if that has taken about 5% as its goal,	1:34
	but you will also recall that late in the year	1:37
	there was a very significant upward revision	1:39
	of the money supply figures.	1:43
	Indeed, this is for two successive years now,	1:45
	you will have had the problem of the Eurodollars	1:47
	and their complications which got away from the Fed	1:51
	and caused them to make a serious mistake	1:55
	in estimating the money supply, so that in fact,	1:56
	for two years as a whole, the rate of monetary expansion	1:58
	has been greater than the Fed thought it was producing	2:03
	at the time where then commentators	2:06
	like myself thought was occurring.	2:08
	And this is indeed one of the explanations	2:10
	why the recession was not as bad as it looked as if	2:13
	it was going to be on the basis of the original figures,	2:19
	as mistakes in figures led us to some extent to a mistake.	2:22
-	I see.	2:24
-	In our estimate,
	that's a larger factor.	2:26
	At an earlier date, when I was evaluating why it was,	2:28
	that the recession, while very much in the direction that	2:31
	I had anticipated was not as severe as I thought it was,	2:34
	I had been looking for other explanations.	2:38
	But now that they've made these far-reaching revisions	2:40
	in the numbers, it looks as if the main explanation	2:43
	is not that there was any change in the relation	2:47
	between the monetary phenomena and the economic phenomena,	2:50
	but that the numbers that were being reported	2:52
	were misleading us as to what was going on.	2:54
	I do hope the Fed has gotten this under control now,	2:57
	it's almost inexcusable in my opinion, that the Fed	2:59
	has not long-since cleaned up all its monetary figures	3:02
	so that this kind of a major error of estimate	3:07
	would not arise.	3:10
	But I say major, it's major from a short-period	3:11
	point of view, it isn't that major from the long-period	3:14
	point of view, but nonetheless.	3:17
	For 1970 as a whole, you had a 5.4% rate of increase,	3:19
	in the narrow money supply,	3:23
	higher than the Fed intended to produce.	3:27
	In the broader money supply, the total that I am,	3:30
	I regard as most reliable which is currency	3:33
	plus all commercial bank deposits	3:36
	minus large certificates of deposits.	3:37
	The rate of increase has been no less than 8.3%	3:41
	in an annual rate for the year.	3:44
	Now, my subscribers will recall that I regard	3:47
	February as a sort of a turning date, that the period	3:50
	when you really started to go to a easier money policy	3:53
	was not December of 1969 but February of 1970, about a month	3:56
	after Arthur Burns came in as chairman of the Fed.	4:01
	And if you take the base as February, both of these numbers	4:04
	are raised somewhat from February to the four weeks	4:07
	ending December, the narrow money supply was rising	4:10
	at the rate of 5.8% and the broader money supply at 9.8.	4:13
	That is to say you had between six and 10%.	4:17
	These are very, very healthy rates of inquiries.	4:20
	In fact, they are rates of inquiries which have never	4:23
	been observed in the past without subsequently	4:25
	setting off an inflationary period.	4:28
	However, they come at an exceptional time, they come	4:30
	after the strongest inflationary period	4:34
	that we've had in history.	4:36
	So that although they are exceptionally high, I continue	4:38
	to believe as I have all along that they are consistent	4:41
	with a tapering off of inflation provided	4:44
	they don't keep on going up at that rate, I think--	4:47
-	We'll see.	4:50
-	I think if we continue to have a monetary increase	4:51
	at the rate of 6% in M1 and 10% in M2,	4:52
	in the broader total, that then the tapering off	4:55
	of inflation would come to an end sometime in the second	4:58
	or third quarter of this year and we would start	5:01
	having a resumption of higher inflation.	5:03
	Now, that brings me to the more recent picture.	5:06
	That's the total for 10 months.	5:09
	And there's been a good deal of discussion in the paper	5:11
	about what's been happening in the last few months	5:13
	because you will recall that there was a period	5:16
	in October when the money supply seemed not	5:18
	to be going up at all, despite the talk about it.	5:21
	And indeed, if you look at the narrow money supply,	5:24
	if you look at M1, you will find that for the period	5:27
	for the last four months,	5:31
	that's September, October, November, December,	5:33
	the period from August, essentially, to December,	5:35
	four months period, the annual rate of increase	5:37
	in the narrow money supply is only 3%.	5:41
	Now, that looks a lot lower and it has led	5:44
	to a lot of discussion about how the Fed	5:47
	fell below its targets and how it will seek	5:49
	to make it up in the coming months.	5:54
	Some commentators have been saying that the Fed	5:56
	will produce a 6%, perhaps, annual rate	5:59
	in the next three months to make this up.	6:02
	However, that's only part of the story.	6:05
	In order to get a full picture of what's going on,	6:07
	you do also have to keep looking at the broader money supply	6:09
	and if you look at the broader money supply, the	6:13
	currency plus commercial bank time deposits,	6:19
	all commercial bank deposits other than CDs,	6:21
	that's been going up at a fabulous rate in that four months.	6:24
	During that four months period, that total has been	6:27
	going up at the annual rate of no less than 15%.	6:30
	Now the reason for that is very straightforward.	6:34
	During the same period, as you all know,	6:37
	short-term interest rates have been coming down drastically.	6:39
	The treasury bill rate has come down	6:43
	so that the treasury bill rate in the last issue was what?	6:45
	4.6%, I think something like that?	6:48
-	Close to it.	6:50
-	A level that hadn't been seen for a very long time.	6:51
	As a result, the ceilings on interest rates	6:54
	on time deposits, the maximum rates, which six, nine,	6:58
	12 months ago were well below market rates are now	7:01
	at the level of or above market rates.	7:05
	And so, whereas earlier you had a disintermediation,	7:08
	as it was called, that is, you had people transferring,	7:12
	trying to transfer their time deposits,	7:15
	or from time deposits into treasury bills	7:18
	or into short-term securities,	7:20
	you are now having it going the other way.	7:22
	And as a result, time deposits have become	7:24
	much more attractive to holders than they were before,	7:28
	relative to other market instruments,	7:31
	and this has shown up, the most sensitive area, of course,	7:32
	is the certificates of deposits.	7:37
	And they have went up and down like a rollercoaster	7:38
	being cut in half over one period and doubling again	7:43
	in the next period.	7:45
	Now, other time deposits are nothing like so volatile,	7:47
	and they haven't behaved that way but they have behaved	7:50
	in the same direction.	7:52
	So the slow rate of growth of M1 in the past four months	7:54
	has not been attributable to a failure of the Fed	7:59
	to feed reserves into the monetary system.	8:03
	It has not been attributable to the fact that the Fed	8:05
	was starving the monetary system of reserves.	8:08
	Rather it has been attributable to the fact	8:12
	that the generous reserves which the Fed	8:15
	has been providing, have been absorbed to a greater extent	8:18
	than earlier as reserves behind the growing time deposits.	8:21
	Now, if you once got rid of all of this silly nonsense	8:27
	of fixed maximum time deposit rates,	8:32
	if you had free market rates on time and demand deposits,	8:35
	you wouldn't be bothered by this divergence between	8:39
	the rates of growth of these two monetary aggregates,	8:42
	but as long as you have that system,	8:44
	anybody who wants to watch the monetary machine	8:46
	has to keep his eye on both of these.	8:49
	And thus, my own conclusion is that the last four months	8:52
	cannot be interpreted as a period	8:55
	in which money has suddenly become tighter.	8:58
	But that is the impression you would gain from looking	9:00
	at M1 alone, but you would gain the opposite impression	9:02
	from the broader total, and on the whole I would say	9:05
	we have continued to have a very expensive monetary policy.	9:08
	And thus, I am not inclined in any way to alter	9:12
	the kind of forecast I was making in an earlier tape	9:16
	about the very favorable prospects for 1971.	9:21
-	I see.	9:26
	Milton, we've read a good deal in the papers lately	9:27
	about the depreciation changes authorized	9:30
	by the administration.	9:33
	A lot of what we've read, I'm afraid,	9:34
	has not been too illuminating.	9:36
	I wonder if you would care to comment	9:37
	on what really has been done and what the meaning of it is.	9:39
-	Well, I think those depreciation changes	9:43
	are a very interesting phenomenon	9:45
	because your interpretation of their effect does depend,	9:47
	is linked very closely to the general interpretation	9:52
	of the role of monetary forces on the one hand,	9:57
	and the kind of investment spending,	10:00
	capital spending approach on the other.	10:03
	That is, it's linked very closely to the dispute	10:05
	between the Keynesian approach	10:07
	to interpreting economic developments	10:11
	and the monetarist approach.	10:14
	Now let me show why that's so.	10:16
	If you are, if you emphasize, if you're emphasizing	10:18
	the Keynesian approach, if you say what really matters	10:22
	to the economy is what's happening to investment	10:25
	and government spending, autonomous spending,	10:27
	then you would have to regard this change	10:30
	in depreciation allowances as a very significant matter.	10:33
	What has happened, is that by a more liberal interpretation	10:37
	of length of life for depreciable assets,	10:42
	the business taxes have, in fact, been reduced.	10:47
	They've been reduced by a sum which will be about, oh,	10:51
	something like, $800 million for the rest	10:55
	of this fiscal year up until June 30th, 1971,	10:58
	and which will be well over $2 billion for the next year.	11:02
	These are not negligible changes.	11:05
	Not only have business taxes been reduced, it's been reduced	11:08
	in a particular way which will make investment	11:11
	more attractive, because the amount	11:14
	of depreciation allowances, of course,	11:18
	is linked to the amount of investment.	11:19
	And, in effect, what you're doing here is to undo	11:21
	what was done a year ago or two years ago	11:25
	by eliminating the investment tax credit.	11:28
-	I see.	11:29
-	The investment tax credit was a special gimmick	11:31
	in order to stimulate business investment.	11:33
	And indeed, the argument that was made	11:36
	for the investment tax credit at the time it was introduced	11:39
	was exactly the same argument that you needed	11:42
	to stimulate business investment in order to promote growth	11:44
	and in order to promote a expansive economy.	11:48
	Then what happened was that in the inflationary era	11:51
	of 1968, when business capital spending seemed	11:54
	to be going all out of hand, there was great pressure	11:57
	to eliminate the investment tax credit	12:00
	in order to discourage capital spending.	12:02
	Now capital spending has been dropping sharply.	12:04
	It's been going down,	12:07
	there's no longer a boom in capital spending,	12:08
	and so you have another move to stimulate it.	12:10
	It's another step in this.	12:12
	I may say, as a digression,	12:14
	that from a pure tax point of view, I welcome the move.	12:15
	I welcome the move for two reasons, well, three reasons.	12:19
	The first is that I am in favor of reducing taxes	12:22
	under any and all circumstances for whatever excuse,	12:24
	because I think taxes are much too high	12:27
	and that high taxes tend	12:29
	to promote high government spending,	12:30
	and the only way in which you're ever going to be able	12:32
	to get high government spending down is by first	12:34
	getting taxes down, so that the Congress is under pressure	12:36
	to keep spending down, so on that score I welcome it.	12:40
	In the second place, the reforms in the Revenue Act	12:42
	of a couple years ago tended to raise business taxes	12:47
	relative to consumer taxes, that is to say, the elimination	12:51
	of the investment tax credit raised business taxes	12:55
	and almost all of the reductions in taxes	12:57
	were concentrated on individual taxes.	12:59
	Now, I believe business taxes are a bad thing,	13:02
	businesses cannot pay taxes.	13:04
	A corporation has no ability to pay whatsoever.	13:06
	Insofar as it pays taxes, it's either the customers	13:09
	who are paying it or the workers who are paying it	13:12
	or the stockholders who are paying it.	13:15
	And now it seems to me, that one of the major bad effects	13:16
	of business taxes is that they are concealed	13:20
	from the ordinary man.	13:22
	It looks as if you're getting taxes and nobody is paying it	13:23
	or some faceless, nameless corporation is paying it.	13:26
	And from the point of view of sensible public policy,	13:29
	it seems to me far better to have taxes levied on people,	13:32
	not on corporations, so I welcome this in the second place	13:36
	as a good tax change by reducing business taxes	13:42
	and increasing taxes on individuals.	13:48
	And in the third place, it has always been my opinion	13:50
	that it was highly desirable	13:52
	to let businesses be as flexible as possible	13:54
	in the distribution of their depreciation allowances.	13:57
	It seems to me that's a business decision and not something	13:59
	that ought to be decided by the Bureau of Internal Revenue.	14:02
	So on pure tax grounds, I think this is a good change.	14:04
	But the change was not made on tax grounds.	14:07
	The change was made in the belief	14:09
	that it would stimulate the economy,	14:12
	that we needed something to stimulate capital spending	14:14
	and to stimulate the economy,	14:16
	so let me go back to that line of reasoning.	14:18
	As I say, if you look at the mode of force	14:20
	as being investment spending and government spending,	14:23
	as a Keynesian approach does, well then you will say	14:27
	this is a highly stimulating factor	14:30
	'cause you're raising autonomous spending,	14:32
	you're raising investment spending	14:34
	by first providing more funds to corporations	14:36
	with which to make such spending	14:40
	in the form of reduced taxes, and second,	14:41
	by making it more profitable to engage in it.	14:44
	But now let's suppose you look at it	14:48
	from an alternative point of view, from my point of view,	14:49
	from the monetary point of view, what sorta,	14:51
	why would I say that that's not right?	14:53
	Because I would say, there's nothing	14:56
	about the investment spending,	14:59
	about the depreciation allowances,	15:02
	that alters the total funds available.	15:05
	If the quantity of money increases at the same rate	15:08
	as before, you have the same total amount	15:11
	of funds available, what's the effect?	15:14
	Well, you have to do it on two levels.	15:17
	Step number one,	15:19
	the government takes in a billion dollars less in taxes,	15:22
	the corporations keep a billion dollars	15:26
	that they otherwise would have paid.	15:28
	Then, government has to borrow a billion dollars more,	15:29
	corporations have to borrow a billion dollar less.	15:33
	If this were a reduction in consumer taxes, you would say	15:36
	it would not all take the form of a reduction in borrowing,	15:39
	but this is a reduction in business taxes, and taxes	15:42
	on profit, and its main effect will be to increase	15:45
	from this point of view, the cashflow of businesses.	15:49
	So on the first order, you have simply a trade-off,	15:51
	government borrows more and business borrows less.	15:54
	Where is there any stimulus to the economy?	15:56
	Well, the second level is that that argument neglects	16:00
	the influence of the more liberalized appreciation	16:06
	on the incentive to invest.	16:10
	Now it will be in the business interest to invest more.	16:12
	Alright, what does that mean?	16:15
	That means that they will try	16:17
	to borrow more funds in the market.	16:19
	How can they borrow more funds in the market	16:21
	to make such an investment?	16:23
	By bidding up the interest rate	16:24
	and bidding the funds away from somebody else.	16:25
	There is a, this isn't insofar as,	16:29
	now if this increased investment were going to be fueled	16:30
	by printing new money, it would be a different matter,	16:35
	but if we suppose that monetary policy holds stable,	16:37
	then we have the same increase in the quantity of money	16:40
	as we would have before.	16:43
	Then roughly speaking, total spending is going to be	16:44
	what it was before, the total funds available	16:46
	for lending the business or government or the housing	16:49
	is going to be what it was before.	16:52
	And so, on this level, insofar as the depreciation	16:54
	liberalization stimulates business capital spending,	16:59
	it will lead business to absorb a larger fraction	17:03
	of the pool of lendable funds and leave less over	17:07
	for somebody else, maybe for housing for other people.	17:10
	It doesn't mean that interest rates will go up on this score	17:13
	but it means that if they would otherwise have gone down	17:15
	they will go down less than they otherwise would.	17:18
	That is the aggregate overall effect of this in my opinion,	17:20
	is in the first instance on the first level, nothing.	17:24
	On the next level, if you take account of the effect	17:28
	on investment spending to make interest rates	17:30
	a little higher than they otherwise would be.	17:33
	Now, I do not believe this second effect will be very strong	17:35
	in the short run, right now the prospects	17:38
	for capital spending are not very great.	17:41
	this is a small change, not even the proponents	17:43
	of this measure believe	17:47
	it's gonna have a big effect in this direction.	17:47
	So over the next year I would be inclined to say this	17:50
	will have a negligible effect on anything	17:52
	except the government deficit	17:55
	which will be higher than it otherwise would be.	17:57
	And private profits which will be higher.	17:59
	It oughta raise stock prices on this account	18:01
	because it leaves a larger cashflow for businesses.	18:03
	Looking over the next five years, its main effect	18:07
	will be to make interest rates higher	18:09
	than they otherwise would be,	18:11
	to increase capital spending at the expense of,	18:12
	let's say housing or some other absorption of funds.	18:16
	And that's why it's interesting to use this	18:20
	as an illustration of what different conclusions you get	18:22
	according as you take different approaches to the subject.	18:25
-	Milton, President Nixon has expressed alarm on an increase	18:31
	in steel prices initiated I think, by Bethlehem Steel	18:34
	and engaged generally in what we speak of as jawboning.	18:37
	What's your reaction to that?	18:41
-	I regret it, I regret it exceedingly, I think it's,	18:43
	that Mr. Nixon's initial policy and the policy	18:47
	he has pretty well held to saying that prices	18:51
	are a market problem and not a government problem,	18:55
	that the government is not going to engage	18:57
	in price-fixing or in controlling prices or wages,	18:59
	that that's going to be determined on the market	19:02
	and the government will restrict itself to general fiscal	19:04
	and monetary policies which will control aggregate demand.	19:06
	It seems to me that's the right policy,	19:09
	the policy he has been following	19:11
	and the policy he should be, continue to be following.	19:13
	On the other hand, you can perfectly well understand	19:16
	why he did what he did.	19:18
	He has been under great pressure from many sources,	19:21
	not least I am sorry to say, from Arthur Burns,	19:23
	who has been proposing an incomes policy,	19:25
	to take a more active view	19:28
	it's kind of galling on him for him to have to sit back	19:30
	and say to the public, well now have patience,	19:33
	have patience, however correct it is, however valid it is,	19:35
	it's not a position that gets very good headlines	19:38
	in the newspapers.	19:40
	He's been subject to great criticism by the opponents	19:41
	and it's, and I am very much, he probably is saying	19:45
	to himself, well now, what harm can this do?	19:49
	Now let me say one other thing.	19:51
	It's hard to know what you say	19:54
	when you have bad reasons for doing good things.	19:55
	(William laughs)	19:58
	We go back to the investment,	19:59
	to the liberalization and depreciation.	20:02
	I think it's a good thing to liberalize depreciation,	20:03
	but the reason given, I think, it's a bad reason.	20:06
	Similarly, the president has threatened that if other	20:08
	steel industry, steel companies raise prices,	20:12
	he will liberalize the--	20:15
-	Import.	20:16
-	Import limits.
	Well, I would love to see those import limits eliminated.	20:18
	I'm a free trader, I think we ought to have free trade.	20:22
	Now here again, you should have realized this is talk.	20:24
	As of the moment, those import limits	20:28
	are utterly ineffective because the fact is that the demand	20:30
	for steel in the rest of the world has been such	20:33
	that you haven't been hitting the limits on the imports.	20:37
	So it's really, it may change	20:40
	if conditions change in the rest of the world.	20:42
	But getting rid of those limits is a good thing,	20:45
	but this reason for getting rid of them is a foolish thing	20:48
	and you sort of, it's very, I find it very hard myself	20:51
	to reach a sensible conclusion.	20:55
	I guess my instinct is to say, you ought to hue	20:58
	to the straight and narrow line	21:01
	of not promoting public misunderstanding.	21:03
	The only thing a comment of this kind can do is	21:06
	to promote public misunderstanding.	21:09
-	Thank you very much, we've been visiting	21:12
	with Professor Milton Friedman of the University of Chicago.	21:14
	If any of you would like to suggest questions	21:17
	or subjects for Dr. Friedman to discuss on future tapes,	21:19
	please write your suggestions	21:23
	to Instructional Dynamics Incorporated,	21:24
	166 East Superior Street Chicago, 60611.	21:27
	We'll be visiting with Dr. Friedman again	21:34
	in a couple of weeks.	21:35

Item Info

Title:

Tape 65 - Monetary Developments, Depreciation Liberalization, Steel Prices

Date:

1971

Contributor:

Friedman, Milton, 1912-2006

Subject:

Format:

audiocassettes

Language:

English

Digital Collection:

Paul A. Samuelson papers, 1933-2010 and undated

Source Collection:

Paul A. Samuelson papers, 1933-2010

Series:

Economics Cassette Series: Milton Friedman

Rights:

Limited Re-Use

CC BY-NC 4.0

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This material is made available for research, scholarship, and private study. Copyright in this material has not been transferred to Duke University. For reuses of this material beyond those permitted by fair use or otherwise allowed under the Copyright Act, please see our page on copyright and citations: https://library.duke.edu/rubenstein/research/citations-and-permissions.

Identifier:

RL10082-CS-0257
ref2654_hwz
samuelsonpaul
duke:325279
pstau001256
ark:/87924/r42j68m6r
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Tape 65 - Monetary Developments, Depreciation Liberalization, Steel Prices

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Economists' Papers Archive

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