Tape 54 - Monetary Developments, Interest Rates / Money Supply, British Tax Policy, Debt Liquidation / Dollar Devaluation / Black Angus
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- | Hello, this is Instructional Dynamics, | 0:02 |
inviting you to another of our bi-weekly interviews | 0:04 | |
with Dr. Milton Friedman, | 0:07 | |
Professor of Economics at the University of Chicago. | 0:09 | |
We are taping this interview on Wednesday, July 8. | 0:12 | |
Professor Friedman, have there been | 0:16 | |
any new monetary developments? | 0:18 | |
- | One new development that has kind of | 0:22 |
passed unnoticed is a further change in the directive | 0:24 | |
which the Open Market Investment Committee | 0:28 | |
of the Federal Reserve System issues every three weeks. | 0:31 | |
I say issues, that's wrong. | 0:35 | |
It's the directive, | 0:37 | |
which it gives to the New York Bank about the operations. | 0:38 | |
It's issued to the public only three months later. | 0:40 | |
And what I'm referring to now | 0:44 | |
are the changes that occurred in the directive | 0:45 | |
in March, three months ago. | 0:49 | |
You will recall that in January, a major shift took place. | 0:52 | |
Prior to January, the directive had specified | 0:57 | |
the instructions to New York | 1:01 | |
in terms of money market conditions. | 1:03 | |
By money market conditions, the directive refers to, | 1:06 | |
fundamentally to interest rates. | 1:09 | |
The Treasury Bill rate, Federal Funds rate | 1:11 | |
and other similar interest rates. | 1:14 | |
The earlier form of the directive, before January, | 1:17 | |
had said that the bank in New York, | 1:20 | |
the desk at New York was to maintain | 1:24 | |
specified money marketing conditions with a proviso clause | 1:26 | |
saying provided that this is consistent | 1:30 | |
with the changes in monetary aggregates | 1:32 | |
within certain specified ranges. | 1:35 | |
In January, what happened was that the major criteria | 1:38 | |
in the proviso were reversed, | 1:44 | |
that is, the directive specified that the desk | 1:46 | |
was to achieve a certain rate of growth | 1:50 | |
in monetary aggregate | 1:53 | |
provided that this did not involve | 1:54 | |
money market conditions outside of an indicated range. | 1:59 | |
In March, there was a further | 2:03 | |
and basically more fundamental shift. | 2:05 | |
Instead of the instructions being stated in these terms, | 2:08 | |
what the instructions said was that the desk | 2:12 | |
was to maintain monetary conditions that would be | 2:15 | |
consistent with specified rates of growth | 2:18 | |
in the monetary aggregates. | 2:21 | |
This in effect drops the proviso clause, | 2:23 | |
and essentially substitutes | 2:26 | |
the single criterion of monetary aggregates | 2:27 | |
for the dual criterion that had been used before. | 2:30 | |
I don't want to overstate the importance | 2:33 | |
of this on the actual operating procedures. | 2:36 | |
The statements of the directives | 2:38 | |
are always deliberately vague. | 2:40 | |
They seldom are stated in terms of precise numbers | 2:44 | |
like achieve over the next three weeks | 2:47 | |
at 2.78965 percentage point rate of growth | 2:49 | |
and the quantity of money. | 2:53 | |
They rather achieve a rate a growth | 2:54 | |
consistent with the staff projections, | 2:56 | |
and then when you check what the staff projections are, | 2:58 | |
they tend to have quite a wide range in them. | 3:01 | |
But nonetheless, this is further evidence | 3:04 | |
that a major shift has taken place | 3:07 | |
in the attitude of the Federal Reserve System | 3:10 | |
toward the quantity which it is going to take | 3:13 | |
as its primary criterion of policy. | 3:15 | |
The next major shift to watch for, | 3:18 | |
and the one that in some ways would be even more important, | 3:21 | |
will be a change in the mode of operation | 3:24 | |
of the New York desk, | 3:26 | |
which will make it possible for the Fed | 3:28 | |
to achieve control over the money supply aggregates | 3:31 | |
more promptly and more accurately. | 3:35 | |
- | What about the behavior of the quantity of money? | 3:38 |
- | Well now, I had been saying monetary aggregates, | 3:41 |
because if you look at those directives, | 3:45 | |
you will see that there are still moldable objectives | 3:46 | |
in the sense of which monetary aggregates are talked about. | 3:52 | |
The staff projections talk about the money supply, | 3:54 | |
by which they mean M1, | 3:58 | |
that is currency plus adjusted demand deposits. | 4:01 | |
They also talk about the bank credit proxy | 4:04 | |
and the adjusted bank credit proxy. | 4:08 | |
The bank credit proxy is fundamentally | 4:10 | |
member banked demand deposits. | 4:13 | |
The adjusted bank credit proxy | 4:15 | |
is member bank demand deposits | 4:18 | |
adjusted for non-deposit sources of funds, | 4:20 | |
such as Eurodollars and other borrowings. | 4:23 | |
For our purposes, what we're interested in | 4:29 | |
from the point of view of the economy | 4:31 | |
is not really these bank credit proxies, | 4:33 | |
but the money supply, and as you know, | 4:36 | |
I have tended to stress two major money supply aggregates. | 4:38 | |
The narrow money supply currency plus demand deposits, | 4:43 | |
adjusted, and a broader money supply, | 4:46 | |
including commercial buying time deposits, | 4:49 | |
but excluding the large CDs. | 4:53 | |
The desirability of excluding the large CDs | 4:55 | |
was reinforced by the Federal Reserve Action, | 4:59 | |
one of the actions which they took | 5:05 | |
in response to the Penn Central failure. | 5:07 | |
In order to assure they, | 5:10 | |
or to improve the possibility of banks | 5:14 | |
taking over various commercial paper | 5:17 | |
outstanding by railroads and others | 5:22 | |
and thus avoiding difficulty in the financial markets, | 5:23 | |
the Fed eliminated the ceiling on the interest rates | 5:27 | |
that commercial banks could pay on large CDs. | 5:33 | |
I say this is the ostensible reason that was given. | 5:37 | |
Of course, one ought to look behind it. | 5:40 | |
The fact of the matter is that very few people | 5:41 | |
in the financial community | 5:44 | |
and certainly not the Federal Reserves board itself | 5:45 | |
have much to say in favor of Regulation Q. | 5:49 | |
They would like to get rid of it, | 5:52 | |
they would like to get out from under | 5:53 | |
the setting of maximum interest rates | 5:55 | |
that banks may pay on any of their deposits. | 5:57 | |
The Penn Central offered a very convenient excuse | 5:59 | |
in an opportunity at least to get rid of one part of it, | 6:02 | |
and I suspect that that played at least as large a role | 6:05 | |
in that way as an excuse as it did as the real reason. | 6:12 | |
However, it is true that it was a desirable step to take | 6:16 | |
and does increase the flexibility | 6:19 | |
and adaptability of the banking system. | 6:20 | |
At any rate, the effect of that is going to be | 6:22 | |
a substantial and rapid increase in CDs, | 6:25 | |
and once again the money figure which included CDs | 6:28 | |
will be misleading, because it will represent | 6:32 | |
as an increase in the money supply what is really a transfer | 6:36 | |
in the name attached to certain deposits. | 6:39 | |
You will now see domestic CDs replacing Eurodollars, | 6:42 | |
all a big bookkeeping change and not affecting much | 6:46 | |
in the economy at all. | 6:49 | |
To go back to what the figures show, | 6:50 | |
you will recall that in my tape two weeks ago, | 6:55 | |
I stressed that you had a very rapid rate of growth | 6:58 | |
in the quantity of money in the prior few months, | 7:01 | |
and that there was a real question | 7:04 | |
of interpreting the figures, that the question was, | 7:06 | |
well we were off on another surge of overreaction | 7:09 | |
which would restart the inflation, | 7:13 | |
or whether we had a temporary bulge | 7:15 | |
in response to the combination of circumstances. | 7:18 | |
The stock market panic plus | 7:21 | |
a large government financing operation | 7:23 | |
that happened to coincide | 7:26 | |
with the announcement of Cambodia. | 7:27 | |
The further evidence of the past two weeks | 7:29 | |
suggests that the right interpretation | 7:33 | |
is the second of these, | 7:35 | |
that is that we had a temporary bulge. | 7:36 | |
In those two weeks, the Fed has been getting rid of | 7:39 | |
some of the extra money supply | 7:45 | |
at one end of the system earlier. | 7:47 | |
You have had an absolute decline | 7:48 | |
in the seasonally adjusted money supply. | 7:50 | |
If you look at figures averaging out over a broader period, | 7:52 | |
from February to the four weeks ending June 10th, | 7:56 | |
which was the latest figures I had available | 8:01 | |
at the time I dictated the last tape, | 8:03 | |
the money supply had been growing, | 8:08 | |
narrowly defined at 7.5% | 8:10 | |
and with M2 minus CDs at 9.7, close to 10%. | 8:13 | |
That was over roughly a three and a half month period, | 8:19 | |
from February to the middle of June. | 8:25 | |
If we now go two weeks farther on | 8:27 | |
to the latest figures we have available, | 8:29 | |
namely four weeks ending June 24, | 8:31 | |
those rates have come down from 7.5 for M1 | 8:35 | |
to 6% for M1, from 9.7 for M2 minus CDs to 8.3. | 8:38 | |
So that over those, as of now, | 8:46 | |
you've had rates of rise which are too large | 8:48 | |
for a long sustained period, | 8:51 | |
but which are interpretable as a minor bulge. | 8:54 | |
If you average out from December | 8:59 | |
when really the Fed started to try to change its posture, | 9:02 | |
the situation is even more moderate | 9:06 | |
from the four weeks ending December 24th, | 9:12 | |
leaving out the last week of December | 9:15 | |
because there was a big year end bulge in the figures. | 9:16 | |
M1, when it has risen at a rate of just under 5% | 9:20 | |
and M2 minus CDs at just 5% over roughly a six month period. | 9:26 | |
So that taking, averaging out over a half year, | 9:35 | |
you have just about hit the 5% per year, | 9:41 | |
which is about the top range | 9:44 | |
of where it would be desirable to have the money supply go. | 9:45 | |
As a result, I am inclined now to believe | 9:48 | |
that the Fed will continue on the path | 9:51 | |
which it set out and which Chairman Burns | 9:54 | |
set out a path of moderate, | 9:56 | |
of monetary growth but moderate monetary growth, | 10:00 | |
and that it will avoid the overreaction | 10:02 | |
that took place in 1967 and in many other earlier episodes. | 10:05 | |
- | Professor Friedman, interest rates | 10:14 |
were going up sharply until recently, | 10:15 | |
but have been declining in the past week or two. | 10:18 | |
How do you reconcile this | 10:21 | |
with the movements in the quantity of money? | 10:22 | |
- | That is of course a very good and relevant question, | 10:25 |
because on the surface, the movements seem contradictory. | 10:28 | |
During the period in May, | 10:34 | |
when the Fed was increasing the money supply | 10:36 | |
from a short term point of view very rapidly indeed, | 10:38 | |
interest rates were rising, | 10:41 | |
although we would ordinarily expect | 10:43 | |
that the initial short term effect | 10:45 | |
of rapid monetary expansion | 10:47 | |
would be a decline in interest rate. | 10:49 | |
Similarly, in the past few weeks, | 10:52 | |
the Fed has been reducing the quantity of money | 10:54 | |
which we would ordinarily expect in the short run | 10:56 | |
to be associated with a rise in interest rates, | 10:59 | |
and yet interest rates have been coming down. | 11:01 | |
I think what this illustrates is simply the fact | 11:04 | |
that so far as interest rates are concerned, | 11:08 | |
the money supply is only one, | 11:11 | |
and by no means the most important factor | 11:13 | |
determining their movements. | 11:15 | |
The earlier rapid rise in the money supply | 11:19 | |
coincided, as I've already mentioned, | 11:22 | |
with the great stock market panic | 11:24 | |
and with the big Treasury Financing | 11:27 | |
outbreak of the Cambodian venture. | 11:33 | |
This introduced a great deal of uncertainty | 11:35 | |
into the financial markets, | 11:37 | |
both pawn markets and stock markets, | 11:38 | |
and therefore it was a factor | 11:41 | |
which tended to raise interest rates, and raise them sharp. | 11:43 | |
And consequently, the most that the rapid increase | 11:46 | |
in the money supply did | 11:50 | |
was to offset a little bit this rapid rise. | 11:51 | |
Similarly, now that the panic has sort of evaporated, | 11:54 | |
now that you had the Cambodian venture | 11:58 | |
turning into a tactical exercise | 12:01 | |
rather than a major change | 12:04 | |
in the whole character of the Indochina War, | 12:06 | |
you've had a reverse movement. | 12:08 | |
This reverse movement has, to some extent, | 12:11 | |
I think been reinforced by the money supply movements. | 12:13 | |
In looking at the money supply movements, | 12:21 | |
I think you have to look at two aspects. | 12:23 | |
The first of them is what they're actual, | 12:25 | |
real effect is in altering liquidity. | 12:28 | |
That used to be the only thing you had to look at. | 12:32 | |
But more recently, thanks to the wider understanding, | 12:35 | |
some people would say acceptance of a fallacy, | 12:41 | |
but let me say understanding, the wider understanding | 12:45 | |
of the crucial role of monetary supply changes, | 12:48 | |
changes in monetary policy and in the quantity of money | 12:52 | |
have had a psychological influence | 12:57 | |
as well as a direct influence. | 12:59 | |
That is to say, the fact that the money supply | 13:01 | |
has been coming down, | 13:04 | |
the fact that that bulge in the money supply | 13:05 | |
looked as if it was going to be temporary, | 13:08 | |
has many participants in the market recognizing | 13:10 | |
we are not starting off on another round of inflation. | 13:13 | |
It may be inflation is really | 13:16 | |
going to be kept under control, | 13:18 | |
and as a result on a psychological level | 13:20 | |
has led them to look forward to lower, | 13:22 | |
lower interest rates, particularly long term interest rates. | 13:26 | |
So I would say that the perverse movements, | 13:29 | |
the apparently perverse movements, | 13:32 | |
are to be explained by two factors. | 13:34 | |
The changes in the general political | 13:37 | |
and economic situation in the United States, | 13:40 | |
and the interpretation placed by participation, | 13:43 | |
participants in the market on the money supply movements. | 13:48 | |
Now as to the situation from here on out, | 13:51 | |
that depends in no small measure | 13:54 | |
on how seriously the Middle East situation develops. | 13:58 | |
President Nixon's comment the other day | 14:04 | |
that fundamentally the Middle East situation | 14:06 | |
was a more dangerous one than the South East Asia situation, | 14:08 | |
plus the Israeli announcement | 14:13 | |
that Russians have been firing missiles at their planes. | 14:16 | |
That has understandably and correctly | 14:20 | |
caused a great deal of concern about the Middle East. | 14:23 | |
If this became severe enough, | 14:26 | |
it could reinstall a panic atmosphere | 14:28 | |
that we had in May, and anything might happen. | 14:31 | |
- | Professor Friedman, | 14:35 |
we have a fair number of subscribers' questions on hand. | 14:36 | |
This might be a good time to turn to them. | 14:40 | |
The first one relates clearly | 14:43 | |
to the discussion that preceded. | 14:46 | |
If the recession continues to deepen, | 14:49 | |
would you not expect some decline in bank loans? | 14:52 | |
Furthermore, if the Treasury does all its financing | 14:55 | |
outside the banking system | 14:58 | |
and banks do not add to their investments, | 15:00 | |
what can be done to increase the money supply? | 15:02 | |
- | Well, this is in part one of those questions, | 15:06 |
if I had some ham, | 15:08 | |
I could have some ham and eggs if I had some eggs. | 15:10 | |
The fact is | 15:14 | |
that these things will not simultaneously occur. | 15:16 | |
Let us suppose the recession continues to deepen. | 15:24 | |
It might well be that there would be | 15:27 | |
a decline in bank loans. | 15:28 | |
However, if the Fed were acting to raise the money supply, | 15:31 | |
what would they be doing? | 15:36 | |
They would be adding to the reserves of commercial banks. | 15:37 | |
With commercial banks not making bank loans | 15:41 | |
and having extra reserves, what would they do? | 15:44 | |
Would they simply hold those reserves idle, | 15:47 | |
bearing no interest? | 15:49 | |
Would excess reserves mount to levels | 15:50 | |
not seen for many years? | 15:53 | |
Any glance at the figures on excess reserves | 15:55 | |
show that they are a very small magnitude | 15:58 | |
and that they are seldom more | 16:00 | |
than a couple hundred million dollars, | 16:02 | |
which is trivial in a banking system | 16:04 | |
in which total deposits for the banking system | 16:07 | |
run up in the 350 to 400 billion dollars. | 16:10 | |
So the answer to this question is | 16:14 | |
that if bank loans declined, | 16:16 | |
if the Fed added to bank reserves, | 16:18 | |
banks would seek to put those bank reserves to work, | 16:21 | |
and they always could. | 16:25 | |
How could they? | 16:26 | |
They always have available to them | 16:27 | |
the purchase of securities on the market. | 16:29 | |
They can purchase Treasury securities. | 16:32 | |
The Treasury cannot decide by itself | 16:34 | |
whether it's gonna do all its financing | 16:37 | |
outside the banking system. | 16:38 | |
The banks decide that. | 16:40 | |
Then the Fed, by providing the banks with reserves | 16:42 | |
would give them an inducement | 16:46 | |
to add to their investments | 16:48 | |
at the same time that they were reducing their loans. | 16:50 | |
I'm not saying they will reduce their loans, | 16:52 | |
but I'm saying that would not in any way | 16:54 | |
prevent the Fed from increasing the money supply. | 16:56 | |
- | Another subscriber says an Associated Press dispatch | 17:00 |
in the paper states Britain's new conservative government | 17:04 | |
prepared Tuesday a plan to fight inflation by cutting taxes. | 17:07 | |
Your comments would be appreciated. | 17:11 | |
- | Well, there has been a good deal | 17:14 |
of interesting discussion about that in the paper. | 17:15 | |
As my subscribers know, | 17:18 | |
I think that the only fundamentally effective way | 17:20 | |
to fight inflation is to cut the rate of growth | 17:24 | |
of the money supply. | 17:28 | |
If the British government does that, | 17:30 | |
then it certainly would be desirable | 17:32 | |
from many points of view for them to cut taxes. | 17:35 | |
In particular, the British government | 17:38 | |
has been stressing, the new British government, | 17:41 | |
conservative government, has been stressing | 17:43 | |
a class of taxes that were imposed by the Labour Government | 17:44 | |
that have seriously distorting effects | 17:47 | |
on the allocation of resources. | 17:49 | |
One of these for example is the Selective Employment Tax, | 17:51 | |
which taxes employment in certain industries | 17:54 | |
and not in other industries. | 17:57 | |
So that I would say from my point of view | 17:59 | |
that I don't believe you will in fact, | 18:03 | |
in any immediate direct sense, | 18:06 | |
fight inflation by cutting taxes, | 18:07 | |
but I do think that cutting taxes in Britain | 18:10 | |
as well as in the United States | 18:13 | |
would contribute to a more productive | 18:15 | |
and efficient economy, | 18:16 | |
that this would in the long run fight inflation | 18:18 | |
by permitting a more rapid rate of rising up. | 18:21 | |
From the short run point of view, however, | 18:24 | |
there is no effective way to fight inflation, | 18:26 | |
except to cut down the rate of growth of the money supply. | 18:29 | |
- | Another subscriber writes, | 18:31 |
this is the second time I have asked this question. | 18:34 | |
The Canadian economists say we have to have | 18:37 | |
a lot more debt liquidation to go through | 18:40 | |
before we can lay the foundation for a true prosperity. | 18:43 | |
Do you agree? | 18:46 | |
- | Well let me start out by apologizing to this subscriber | 18:48 |
for not having answered his question before, | 18:52 | |
and to explain to all the subscribers | 18:54 | |
that I get a good many more questions | 18:56 | |
than I can really answer in the course of these tapes, | 18:58 | |
and I wish I could answer all of them. | 19:02 | |
I try to pick those which have the most wide interest, | 19:05 | |
and so I apologize to anyone | 19:10 | |
whose questions I have not used. | 19:12 | |
I hope it won't discourage you from sending them in, | 19:14 | |
because the more I have, | 19:16 | |
the better able I am to judge | 19:18 | |
what is the range of your interest, | 19:21 | |
and I really like very much | 19:22 | |
to get the feedback that comes through the questions. | 19:24 | |
But let me try to answer this gentleman's question. | 19:27 | |
There is the old idea that used to be prevalent | 19:32 | |
that depressions were a necessary evil | 19:36 | |
in order to eliminate the accumulation of bad practices, | 19:39 | |
and as a purgative for the body economic | 19:45 | |
to enable it to resume a healthy growth. | 19:47 | |
There is, as in all such things, | 19:52 | |
there is an element of truth in it, unquestionably. | 19:54 | |
There is no doubt that prosperity | 19:56 | |
leads to all sorts of soft practices, | 19:58 | |
to all sorts of waste in costs, | 20:00 | |
lack of attention to cost cutting, | 20:04 | |
going into debt that's not justified and so on. | 20:06 | |
And therefore, it is also true | 20:09 | |
that recession or economic hard times | 20:11 | |
do have some positive effect. | 20:14 | |
There's hardly a cloud that doesn't have | 20:16 | |
some kind of a silver lining, | 20:18 | |
and it does have some positive effect | 20:19 | |
in getting rid of the least efficient | 20:21 | |
and the least effective firms, | 20:23 | |
and forcing all enterprises | 20:25 | |
to tighten their belt and improve their lot. | 20:27 | |
But I think that it is very easy | 20:30 | |
to go too far along this direction. | 20:35 | |
That in the mind, the problems of recession | 20:38 | |
do not contribute significantly | 20:42 | |
to an improvement in the economic system | 20:45 | |
if they are simply costs that are born. | 20:47 | |
They may have to be born as of now | 20:49 | |
in order to get rid of the prior mistake of over inflating. | 20:51 | |
Now the question is, | 20:55 | |
do we have to have more debt liquidation | 20:56 | |
before we can lay the foundation for a true prosperity? | 20:58 | |
The answer to that I think is no. | 21:01 | |
There is a good deal of debt. | 21:05 | |
It may be that there will be more debt liquidation. | 21:06 | |
I do not think that will seriously interfere | 21:09 | |
with our resuming growth, | 21:11 | |
but I do not think that there is any reason | 21:13 | |
why we have to go through debt liquidation. | 21:15 | |
New enterprises can raise debt on the market at the same, | 21:19 | |
can raise funds in the market at the same time | 21:22 | |
that old enterprises may be having some difficulty. | 21:24 | |
New capital can be financed by internal funds | 21:27 | |
as well as by external funds. | 21:34 | |
So I think it is perfectly feasible | 21:36 | |
for the community to start expanding | 21:38 | |
and to have a good, healthy expansion | 21:41 | |
without a great mass of debt liquidation. | 21:44 | |
- | Another subscriber writes, | 21:47 |
with the Canadian dollar now free | 21:50 | |
and the European Common Market | 21:52 | |
about to establish a separate currency, | 21:54 | |
how long before we will have to devalue the dollar? | 21:57 | |
- | I would not like to hold my breath | 22:01 |
until the European Common Market | 22:03 | |
does establish a separate currency. | 22:05 | |
There has been a lot of talk about that a very long time. | 22:07 | |
I believe the odds are heavily against | 22:10 | |
the European Common Market being able to agree | 22:13 | |
on a common separate currency | 22:16 | |
for a considerable period in the future. | 22:18 | |
In fact, if I had to lay any wagers, | 22:20 | |
it would be the other way, | 22:23 | |
that the European Common Market | 22:25 | |
is going to continue to become, | 22:26 | |
as it has become, less and less common. | 22:29 | |
If you look at what has actually been common | 22:34 | |
about the European market | 22:36 | |
and the high hopes that were placed in it, | 22:37 | |
there is only one area in which it has really become, | 22:39 | |
well maybe I should say two areas | 22:43 | |
in which it has really become common. | 22:44 | |
The one is that it has eliminated most tariffs | 22:46 | |
between the countries within the Common Market. | 22:50 | |
This has not prevented the maintenance | 22:53 | |
of very high tariffs against outside goods. | 22:55 | |
The other areas is that it has become | 22:58 | |
common in the subsidization of agriculture. | 23:00 | |
It is now getting into the stage | 23:04 | |
that we have been in for so long | 23:06 | |
with our own agricultural program. | 23:08 | |
The Common Market adopted the worst features | 23:09 | |
of our agricultural program, | 23:11 | |
namely high price supports, | 23:13 | |
without even accepting the limitations | 23:15 | |
that we did of restricting, trying to keep production down. | 23:18 | |
As a result, they have an enormous | 23:22 | |
and rapidly growing deficit on agriculture subsidies | 23:25 | |
that they have to pay on agriculture, | 23:28 | |
they have very rapidly and large surpluses accumulating, | 23:30 | |
amounts of butter that are astronomical, | 23:33 | |
and they are going to be up against a very hard issue | 23:36 | |
of what to do with this situation. | 23:39 | |
And so far as establishing a separate currency is concerned, | 23:43 | |
I think that's a very long way off. | 23:46 | |
But let's suppose if this were true. | 23:48 | |
Neither the freedom of the Canadian dollar | 23:52 | |
nor the establishment of a separate currency | 23:54 | |
would mean that we will have to devalue the dollar. | 23:57 | |
In fact, the difficult thing is to know | 23:59 | |
what it means to say devalue the dollar. | 24:01 | |
One meaning of it is to raise the price of gold. | 24:04 | |
We are obviously not going to be forced | 24:07 | |
to raise the price of gold, | 24:08 | |
since we are committed to pay gold | 24:10 | |
only to foreign central banks, | 24:11 | |
and only for monetary purposes, | 24:13 | |
and we can stop doing that at any time we want to. | 24:15 | |
And in any event, if we raised the price of gold, | 24:18 | |
and if all other countries raised the price of gold | 24:21 | |
in their currency the same way, | 24:23 | |
that would not change exchange rates, | 24:25 | |
so it would not be an effective devaluation. | 24:27 | |
The fact of the matter is | 24:30 | |
that the world is now on a US dollar standard | 24:31 | |
and the US has little to say about the exchange rate | 24:34 | |
between its currency and the other countries. | 24:37 | |
On the contrary, the free Canadian dollar | 24:40 | |
shows that it is, | 24:43 | |
that there is no meaning to the devaluation | 24:45 | |
of the US dollar. | 24:49 | |
When Germany appreciated the mark, that was equivalent | 24:50 | |
to a devaluation of the US dollar in terms of the mark. | 24:57 | |
When the price of the Canadian dollar has appreciated, | 25:01 | |
that is equivalent to a depreciation, | 25:06 | |
a devaluation of the US dollar versus Canada. | 25:08 | |
Other countries of the world | 25:11 | |
can either devalue or appreciate vis-a-vis the US dollar. | 25:13 | |
But there is no way at all | 25:16 | |
in which the US can devalue the dollar. | 25:18 | |
This is not necessarily a good thing, | 25:22 | |
but it is a fact of the world, | 25:24 | |
and so we will not have to devalue the dollar | 25:26 | |
by any meaning of the term. | 25:29 | |
- | And here's one for comic relief. | 25:31 |
It comes from someone signed Sir Loin Steak. | 25:33 | |
Does Black Angus have a legitimate beef, | 25:39 | |
or is he just shooting the bull? | 25:41 | |
Of all the verbiage with which I have come in contact | 25:43 | |
on this subject, this is the worst, hereford. | 25:46 | |
- | I don't quite understand all these references, | 25:50 |
but let me explain for the subscribers | 25:52 | |
what this Sir Loin Steak is talking about. | 25:54 | |
Angus, there's a book that has recently appeared | 25:57 | |
entitled A Radical View of Economics, | 26:01 | |
with a red cover, by Angus Black. | 26:05 | |
Now as it happens, Angus Black is a former student of mine. | 26:08 | |
As it also happens, if you look at the book, | 26:12 | |
you will discover that what it is, | 26:14 | |
is large parts of my own book, Capitalism and Freedom, | 26:17 | |
rewritten very well with very healthy doses of obscenity | 26:21 | |
and radical-type language thrown in | 26:26 | |
as a come-on for the radical students and others. | 26:29 | |
My first reaction when I was asked by the publishers | 26:35 | |
to read the manuscript | 26:38 | |
was that the camouflage of obscenity and radical language | 26:40 | |
was not likely to do much good in selling the book, | 26:47 | |
but I am told since that I was wrong. | 26:49 | |
That it has in fact produced a large widespread scale of it. | 26:51 | |
If any of you are interested in looking at it, | 26:55 | |
I think you will find that if you strip it | 26:58 | |
of that kind of obscenity and look at what it says, | 27:00 | |
almost everything it says is perfectly sensible | 27:02 | |
and suggests reforms that are highly desirable. | 27:06 | |
So on the whole, I say more power to Angus Black. | 27:09 | |
- | I'm afraid we've come to the end of this tape. | 27:12 |
Thank you very much, Professor Friedman. | 27:14 | |
Remember, subscribers, if you have any questions or comments | 27:16 | |
for topics you would like to hear discussed in this series, | 27:19 | |
please send them to Instructional Dynamics, Incorporated, | 27:23 | |
166 East Superior Street, Chicago, Illinois, 60611. | 27:26 | |
Dr. Freedman will be visiting with you again in two weeks. | 27:33 |
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