Tape 33 - Nixon Welfare Proposal, Revision of Money Supply Figures Subscribers' Questions
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Interviewer | Hello, this is Instructional Dynamics | 0:02 |
inviting you to another of our bi-weekly interviews | 0:04 | |
with Dr. Milton Friedman, Professor of Economics, | 0:07 | |
at the University of Chicago. | 0:10 | |
We are taping this interview on August 21st. | 0:12 | |
Professor Friedman, the welfare proposal | 0:16 | |
that President Nixon made in his recent television report | 0:18 | |
seems to have more than a family resemblance | 0:22 | |
to your negative income tax. | 0:24 | |
Is that resemblance purely coincidental? | 0:26 | |
Milton | I wouldn't say purely coincidental. | 0:29 |
But I should say that I had not myself been specifically | 0:32 | |
involved in detail with the preparation | 0:36 | |
of the particular proposal that President Nixon made. | 0:39 | |
But that proposal is very similar to the one in part of it. | 0:43 | |
Part of it is very similar to the kind of negative | 0:49 | |
income tax that I have proposed for many years. | 0:52 | |
The similarity is first, in its general form, | 0:55 | |
that it involves an arrangement, | 0:58 | |
whereby, people on welfare would have an incentive to work | 1:02 | |
by enabling them to keep a certain fraction | 1:06 | |
of the income which they earn from outside activities. | 1:08 | |
Under most present arrangements, | 1:13 | |
if a welfare recipient gets an extra $100 in earnings | 1:15 | |
and is honest about it and reports it, | 1:18 | |
his welfare check goes down $100, | 1:21 | |
and therefore, he doesn't have much of an incentive | 1:23 | |
to get such additional income. | 1:24 | |
Now, this is one of the main reasons | 1:27 | |
why I've always been in favor | 1:28 | |
of a negative income tax arrangement | 1:30 | |
under which there would be some incentive to work. | 1:32 | |
Of course, this particular feature of the negative income | 1:36 | |
tax and the general outline of the negative income tax | 1:40 | |
has been widely taken up by many people. | 1:42 | |
It's become very, very large, very popular as an alternative | 1:46 | |
to the present, almost intolerable, system of welfare. | 1:50 | |
So, it was inevitable that sooner or later, | 1:54 | |
a proposal along those lines was going to be made. | 1:57 | |
Perhaps the features that are closest, | 2:00 | |
however, between my particular proposal | 2:03 | |
and the proposal President Nixon made | 2:05 | |
are the numbers involved. | 2:07 | |
I have always argued that at the present stage | 2:09 | |
with the kind of income tax we have, | 2:13 | |
with the kind of welfare arrangements we have, | 2:15 | |
and appropriate level at which to begin, | 2:18 | |
would be to have roughly the present income tax | 2:21 | |
exemptions and then a 50% tax rate. | 2:24 | |
This is not very far from the proposal President Nixon made. | 2:28 | |
The rate is the same, but the exemptions he's suggested | 2:32 | |
are somewhat higher as is perhaps befitting | 2:36 | |
the amount of inflation that we've had | 2:39 | |
since I first made these kinds of proposals. | 2:42 | |
Again, as I say, this is coincidental | 2:45 | |
in the sense that these ideas have been around. | 2:47 | |
There's nothing proprietary about 'em, | 2:51 | |
but certainly there is a very close resemblance. | 2:53 | |
Interviewer | What are the main differences | 2:56 |
from the straightforward income tax? | 2:58 | |
Milton | Well, most of the main differences | 3:00 |
from the straightforward negative income tax | 3:02 | |
were introduced for fairly obvious political reasons. | 3:05 | |
In most respects, I think these differences | 3:09 | |
are not attractive, that is it's from my point of view. | 3:13 | |
I would prefer an absolutely straightforward | 3:15 | |
negative income tax because that seems to be the only way | 3:17 | |
in which you will get the enormous advantage | 3:20 | |
of getting rid of the present welfare bureaucracy. | 3:22 | |
The kind of compromise that President Nixon has proposed | 3:25 | |
threatens, in some ways, to keep you | 3:28 | |
with the worst of both worlds. | 3:31 | |
That is to say, you will have some of the extra, | 3:34 | |
immediate monetary costs involved | 3:37 | |
in shifting to a negative income tax. | 3:39 | |
On the other hand, you will not get anything, | 3:40 | |
like to the full, the great advantage | 3:43 | |
that you might get of dispensing | 3:45 | |
with the whole enormous welfare bureaucracy. | 3:48 | |
Let me indicate more specifically, | 3:50 | |
however, what the main differences are. | 3:52 | |
First of all, certain groups which, in a comprehensive | 3:54 | |
negative income tax would be covered or excluded. | 3:57 | |
These include the people now receiving assistance | 4:00 | |
under categorical programs for old age, | 4:03 | |
blindness, disability, and so on. | 4:06 | |
In the second place, the President's proposal | 4:08 | |
is for a family plan. | 4:11 | |
It excludes single individuals, the status affair | 4:12 | |
of husbands and wife, families without children, | 4:16 | |
was left very ambiguous in the address | 4:19 | |
and it is not clear exactly how they will be handled. | 4:23 | |
Secondly, second main problem, | 4:26 | |
aside from the exclusion of these various groups, | 4:29 | |
a second main problem is how the program | 4:32 | |
is going to tie in with the state and local programs. | 4:35 | |
The proposal made by the President, | 4:42 | |
is that the federal portion | 4:45 | |
of the assistance to the States, | 4:49 | |
be in the form essentially, of a negative income tax. | 4:52 | |
That would replace the present state programs | 4:56 | |
only in those 20 states in which the payments | 4:59 | |
recommended by the President are higher than the payments | 5:04 | |
that are now being made to people on welfare. | 5:09 | |
These are mostly low income states. | 5:11 | |
They are states like Mississippi, Alabama, | 5:13 | |
Missouri, and states of that kind. | 5:16 | |
In which, present payments to recipients are, | 5:18 | |
in some cases, disgracefully low. | 5:20 | |
In those states, the recipients receiving $1600 a year | 5:24 | |
are allowed to earn up to | 5:31 | |
$720 without reduction | 5:34 | |
in their welfare payments at all a year. | 5:38 | |
In those states, the recipients would be entirely | 5:40 | |
on a negative income tax and the state administration | 5:42 | |
would be, could be largely eliminated. | 5:45 | |
In the other states, presumably, | 5:49 | |
the arrangement is that the federal contribution | 5:52 | |
to total welfare expenditures would be calculated | 5:58 | |
on the basis of the President's family security arrangement. | 6:01 | |
But then the state, or the city, | 6:05 | |
would add to it its own contribution. | 6:07 | |
For example, in New York City, New York State, Illinois, | 6:10 | |
Chicago, California, present payments | 6:15 | |
to welfare recipients are decidedly higher | 6:18 | |
than the payments that would be provided | 6:21 | |
under the scheme suggested by the President. | 6:23 | |
This additional sum would then be paid | 6:26 | |
under whatever rules the state provides. | 6:28 | |
It is has always seemed to me, highly desirable | 6:31 | |
to have this kind of a two layer system. | 6:33 | |
It is absurd to have the same level of relief assistance | 6:35 | |
for people living in rural Mississippi | 6:38 | |
and people living in urban New York. | 6:40 | |
The capacities of the community | 6:43 | |
to support them is varied differently, | 6:45 | |
what a given amount of money will buy is very different, | 6:47 | |
the level that makes sense in one place | 6:50 | |
does not make sense in another. | 6:52 | |
And the right way to achieve this is by the kind of a device | 6:53 | |
that the President has suggested. | 6:56 | |
Mainly, having a federal program | 6:57 | |
that provides a very minimum standard throughout the country | 6:59 | |
but is on the low side, is geared to the places | 7:02 | |
where an appropriate level is fairly low, | 7:06 | |
and then to have the states out of their own funds, | 7:08 | |
and the wealthier states, | 7:11 | |
and the states that want to do more, supplement them. | 7:12 | |
However, the desirable way to have them supplemented | 7:14 | |
is by a supplementary negative income tax arrangement. | 7:17 | |
Just as we have a state positive income tax | 7:20 | |
piled on top of a federal positive income tax, | 7:23 | |
it's perfectly feasible, technically, | 7:25 | |
to have a negative income tax on a state level | 7:27 | |
piled on top of a federal negative income tax. | 7:29 | |
But as I understand the President's proposal | 7:32 | |
it does not require that states, in making their payments, | 7:34 | |
should also use the negative income tax route | 7:39 | |
unless that raises a real problem | 7:43 | |
with meshing the state and local programs. | 7:44 | |
There are ways of meshing it, | 7:46 | |
which could completely undermine | 7:48 | |
the incentive feature of the President's proposal. | 7:49 | |
For example, if state's took the line | 7:55 | |
that the amount that they paid was going to be reduced | 7:57 | |
dollar for dollar by recipient's earnings, | 8:00 | |
the incentive affect would be completely lost. | 8:03 | |
The third, very interesting difference, | 8:06 | |
and one that I think is rather an improvement | 8:09 | |
on the original scheme, is the idea of having an initial | 8:11 | |
bracket, as it were, of a zero tax rate. | 8:16 | |
That is, this is the idea that if a person is on welfare, | 8:19 | |
for the first $720 he earns, $60 a month, | 8:23 | |
that should be treated as not reducing | 8:27 | |
in any way, his welfare payment. | 8:29 | |
Now, this makes a good deal of sense | 8:31 | |
in that there are obviously costs attached | 8:34 | |
to taking a job rather than being on welfare alone. | 8:38 | |
More important, it seems to me, | 8:44 | |
the crucial step is to give people as much of an incentive | 8:47 | |
as possible to make that first step off the welfare road. | 8:50 | |
Now, once they've made that, well then it seems to me, | 8:54 | |
you are likely to discourage and much less | 8:56 | |
from staying on at work by a higher rate later on. | 8:58 | |
And therefore, it does seem to me to make some sense | 9:04 | |
to have an initial $720 bracket | 9:07 | |
before the negative income tax rate of 50% starts to bite. | 9:11 | |
Perhaps the most publicized difference, | 9:17 | |
certainly the one that the President emphasized, | 9:19 | |
he had a real problem on this, | 9:21 | |
because during the course of the campaign | 9:23 | |
he had repeatedly stated that he would, | 9:25 | |
under no circumstances, support a guaranteed income proposal | 9:27 | |
by which he meant a negative income tax | 9:32 | |
and yet, here he was doing so, | 9:34 | |
and in order to differentiate himself from it, | 9:35 | |
and to establish that this was not the same program, | 9:37 | |
he made a great deal, and put a great deal of emphasis | 9:40 | |
on a work requirement, on the requirement | 9:42 | |
that no, that aside from mothers | 9:44 | |
of very young children, | 9:49 | |
any other recipients, potential recipients, | 9:52 | |
of assistance under the program, | 9:55 | |
would only get it if they agreed | 9:56 | |
to take training, or to take an available job. | 9:58 | |
And so this work requirement has been greatly emphasized. | 10:00 | |
Now, from one point of view it makes enormous sense | 10:05 | |
if it were a feasible and practical proposal. | 10:08 | |
Obviously, there are very few people | 10:13 | |
who feel that we ought to make | 10:16 | |
federal assistance, | 10:20 | |
or state and local assistance for that matter, | 10:21 | |
available to people who deliberately choose not to work. | 10:23 | |
I have never regarded the positive and the negative | 10:28 | |
income tax myself as clearly a positive good. | 10:30 | |
My own approach has been that we are now stuck | 10:34 | |
in a welfare proposal arrangement that should never | 10:37 | |
have been allowed to grow to the levels it has, | 10:39 | |
probably should never have been started, | 10:42 | |
but once started it has had the affect | 10:44 | |
of causing millions of people to be on welfare and relief | 10:46 | |
who never would have been there in the first place | 10:49 | |
if we hadn't had the whole program, | 10:51 | |
and once we've put them there, | 10:52 | |
once we've induced them to stay there, | 10:54 | |
we've got an obligation to 'em. | 10:56 | |
We can't simply pull out the rug from under | 10:57 | |
which you might like to do, | 10:59 | |
and throw them out in the streets. | 11:00 | |
Consideration is a shear humanity make that impossible | 11:02 | |
and therefore, you have to have a way of getting off | 11:06 | |
of our present system of going | 11:08 | |
from where we are to where we'd like to be | 11:10 | |
and I've always regarded the negative income tax, | 11:11 | |
therefore, not as a positive good in itself, | 11:14 | |
but as an effective device for enabling us | 11:17 | |
to pair down the number of people | 11:20 | |
who are on the relief roles and to render assistance | 11:23 | |
in a more humane and less demeaning fashion. | 11:27 | |
And therefore, from this point of view, | 11:33 | |
I certainly agree with the value's implicit | 11:34 | |
in requiring a work requirement. | 11:38 | |
On the other hand, I think it has a practical matter | 11:41 | |
from the point of view of the way it will | 11:45 | |
in fact actually work, a highly undesirable feature. | 11:46 | |
It is not in fact and it'd be impossible to enforce it. | 11:50 | |
The attempt to enforce it | 11:53 | |
will immediately raise the question, | 11:55 | |
as it has already been raised in discussion, | 11:58 | |
what good does it do to say that people have to go to work | 12:00 | |
unless you provide jobs for 'em, | 12:04 | |
and therefore, it has an inevitable effect | 12:05 | |
to tend to force on the government, | 12:08 | |
the role of employer of last resort. | 12:11 | |
Now this sounds like a very desirable thing. | 12:14 | |
It sounds like a fine thing to say | 12:17 | |
that if a man can't find a job in the private market | 12:18 | |
he should have the government provide a job for him. | 12:21 | |
But in fact, it seems to me, it would be | 12:24 | |
a terribly destructive program to undertake. | 12:26 | |
We had experience with this in the 1930's | 12:29 | |
with the Leaf Raking Program. | 12:31 | |
That is exactly what you would have again. | 12:33 | |
What you would have again would be | 12:34 | |
an enormous waste of man power at very great cost, | 12:35 | |
which would be satisfactory neither | 12:39 | |
from the point of the view of the people involved | 12:40 | |
nor from the point of view of the pubic at large. | 12:43 | |
Now, just as, are well-meaning, well-intentioned | 12:46 | |
relief programs that put millions of people on relief, | 12:49 | |
who would otherwise not be there. | 12:52 | |
So this kind of a program would condemn millions of people | 12:54 | |
to more or less permanent governmental employment | 12:57 | |
who have no business being there. | 13:00 | |
Well for these, in addition, one of the great advantages | 13:01 | |
of the negative income tax in its initial and proper form | 13:05 | |
is that it eliminates the necessity of prying and snooping | 13:07 | |
into the private lives of individuals | 13:12 | |
and lets you have a good deal more impersonality. | 13:14 | |
It carries over the notion of market freedom. | 13:16 | |
Under this arrangement you still have to have the snooping. | 13:20 | |
You have to keep checking to see | 13:23 | |
whether people are able to take jobs. | 13:24 | |
You have to get the government involved to a greater extent | 13:27 | |
than it now is in the employment business, and so on. | 13:30 | |
So in practice, I think the provision | 13:32 | |
is not going to be very effective | 13:35 | |
and is not a very desirable provision. | 13:37 | |
Interviewer | Are there any unresolved issues? | 13:40 |
Milton | Yes, indeed there are two major ones | 13:43 |
that will come up to plague the program | 13:47 | |
and will have to be resolved sooner or later. | 13:51 | |
One is who is going to do the administration? | 13:53 | |
From the negative income tax point of view, the desirable | 13:56 | |
thing is have Internal Review Service administer it. | 13:59 | |
This has the great virtue of meshing | 14:02 | |
the positive with the negative income tax | 14:05 | |
and from the end of perhaps improving collections | 14:07 | |
and eliminating cheating under the positive income tax. | 14:10 | |
It also has the virtue of making a first step | 14:13 | |
on getting rid of your welfare bureaucracy. | 14:16 | |
On the other hand, organizations of course, | 14:19 | |
don't easily give up functions, | 14:22 | |
or don't easily refrain from grabbing for new ones, | 14:25 | |
and so there is great pressure | 14:28 | |
in the Social Security Administration | 14:29 | |
to have the administration of the program | 14:31 | |
assigned to the Social Security Administration. | 14:32 | |
That issue has not yet been resolved. | 14:34 | |
The second major issue is a relation to food stamp plans. | 14:37 | |
The sensible thing to do | 14:40 | |
is to have this replace the food stamp plans. | 14:42 | |
After all, there is no point | 14:44 | |
in giving assistance both in the form of money | 14:46 | |
and in the form of specific items and specific goods. | 14:48 | |
But immediately of course, | 14:51 | |
the senators from the agricultural states, | 14:53 | |
who regard the food stamp plans as an agricultural subsidy, | 14:58 | |
not as a way of assisting the poor, | 15:01 | |
have been up in arms at the idea | 15:03 | |
that this might involve a reduction in the food stamp plans. | 15:05 | |
So that problem will have to be resolved. | 15:08 | |
Interviewer | One major charge | 15:10 |
is that Nixon's levels are too modest. | 15:12 | |
Do you agree? | 15:15 | |
Milton | Far from it. | 15:16 |
I think that it would be, | 15:17 | |
the whole idea of a negative income tax, | 15:20 | |
would be objectionable. | 15:23 | |
If the level of support under it were to be made very high. | 15:25 | |
It would be objectionable for several reasons. | 15:29 | |
One of those is the fact that the number of people | 15:32 | |
involved would then get very, very large. | 15:36 | |
You would then be in a position of making a governmental | 15:38 | |
payments, direct governmental subsidy payments, | 15:42 | |
to a very large fragment of the population. | 15:47 | |
More important, the incentive for people, | 15:49 | |
the incentive for some people to say by hook or crook, | 15:54 | |
they're not going to work, and they're just going to live | 15:58 | |
on the dole, and whatever's paid to 'em | 15:59 | |
would become much larger. | 16:02 | |
50% is still quite a slice and will reduce incentive | 16:03 | |
and if it would be possible for people, | 16:08 | |
without working or without taking jobs, | 16:10 | |
to live at a level that's moderately comfortable, | 16:14 | |
a considerable number of people might do it. | 16:17 | |
I think you can defend a kind of a negative income tax | 16:20 | |
of this arrangement if and only if | 16:24 | |
the bottom minimum level is sufficiently low | 16:26 | |
so that relatively few people will in fact, | 16:29 | |
be willing to accept it instead of the kind of level | 16:32 | |
that can be obtained by employment. | 16:36 | |
In the second place, the cost would be enormous. | 16:37 | |
The cost of raising the minimum level goes up | 16:43 | |
both because of the direct outlays | 16:46 | |
and because it involves, in essence, | 16:49 | |
undermining the positive income tax. | 16:51 | |
Interviewer | Let us turn now to a very different area | 16:54 |
and one that is very close to your heart, I know. | 16:57 | |
The money supply figures have been receiving | 17:01 | |
much attention in the papers recently. | 17:04 | |
Revisions announced by the Fed are said to show | 17:07 | |
that the Fed has not been tightening recently. | 17:11 | |
Are you persuaded? | 17:15 | |
Milton | Well, not quite. | 17:16 |
Now this has been a very interesting statistical exercise. | 17:18 | |
The Fed has revised one particular series. | 17:23 | |
Its series on M1, money narrowly defined | 17:26 | |
currency and demand deposits. | 17:29 | |
It has revised these for what unquestionably | 17:30 | |
was a defect in the earlier figures. | 17:34 | |
Now, this is a highly complicated technical defect | 17:36 | |
that has to do with the particular handling | 17:39 | |
of the bookkeeping items involved, | 17:41 | |
in the repayment of Euro dollar loans, | 17:46 | |
of loans from Euro dollar banks, | 17:50 | |
and particularly loans negotiated | 17:52 | |
through the branches of American banks in Europe, | 17:56 | |
for the parent bank in New York or Chicago. | 17:59 | |
And certain ways of handling on the books, | 18:03 | |
these arrangements turned in essentially, | 18:07 | |
to a rather sophisticated version | 18:11 | |
of what you and I know as the kiting of checks. | 18:15 | |
Whereby, the banks were able to reduce | 18:17 | |
the amount of reserves they required, | 18:20 | |
essentially by such a process. | 18:22 | |
The Fed recently put in some regulations | 18:24 | |
designed to eliminate this process | 18:27 | |
and in doing so, they also revised the money supply figures | 18:29 | |
to eliminate the understatement that had been produced. | 18:33 | |
The questionable item, or the problem, | 18:37 | |
is really how those revisions were spread back over time. | 18:39 | |
They're apparently, the Fed made a survey of banks | 18:46 | |
to get some information on the basis | 18:50 | |
of which to spread it back over time. | 18:51 | |
But we have still do not have enough information | 18:53 | |
to know how comprehensive and reliable that is. | 18:56 | |
At any rate, it so turned out that the Fed's revisions | 18:58 | |
were concentrated in the past few months | 19:01 | |
and were almost as if designed to counter the criticism | 19:04 | |
that I and other people have been making of them | 19:10 | |
that in the past three months, | 19:12 | |
they shifted sharply to tighten. | 19:14 | |
Now, it may be that those are correct revisions | 19:16 | |
but it should be noted that there are other defects | 19:19 | |
in the figures that the Fed is now working on, | 19:24 | |
that the Fed has announced that it is going to revise | 19:26 | |
the seasonal shown by the figures | 19:29 | |
and get a new seasonally adjusted series. | 19:32 | |
And all of the evidence I have been able | 19:34 | |
to look at suggests that if the Fed had made | 19:36 | |
all its revisions at one time, | 19:39 | |
instead of making them in pieces, | 19:41 | |
you would have had a picture that is almost the same | 19:43 | |
as the picture shown by the unrevised figures. | 19:45 | |
That these two changes they were going to make | 19:47 | |
would offset one another. | 19:50 | |
From that point of view, I think it is very unfortunate | 19:51 | |
that they did not choose to make them | 19:54 | |
simultaneously at the same time. | 19:55 | |
By first revising them in one direction, | 19:57 | |
and then revising them back in the other, | 19:59 | |
the Fed is likely to undermine the credibility | 20:01 | |
of these figures and its own creditability | 20:03 | |
as a supplier of such figures. | 20:05 | |
I should emphasize that the revisions | 20:07 | |
from any longer point of view are not very important. | 20:09 | |
They are a minor change amounting to less than, | 20:13 | |
to roughly, about 1, 1.5% in the level of the series. | 20:16 | |
However, from the point of view of movements | 20:21 | |
over a period of two or three months, | 20:23 | |
that can be very large and very disturbing. | 20:25 | |
Yet, when all this is said and done, | 20:29 | |
if you look at the figures, and not only of these single | 20:30 | |
figures they revised, but the whole collection of figures, | 20:35 | |
the conclusion I have reached on a careful restudy | 20:38 | |
of the figures is that it does not change the basic picture. | 20:41 | |
It moderates it but it does not change it. | 20:45 | |
Under the old figures, M1 alone, | 20:47 | |
that is currency plus demand deposits, | 20:50 | |
had risen from December 1968 to April 1969 | 20:52 | |
at an annual rate of 4.1% and from April to July at 0.2%. | 20:57 | |
That is, you had gone from a 4% rate of rise | 21:03 | |
to a 0% rate of rise. | 21:06 | |
Under the new revised figures, that first figure, | 21:08 | |
December to April, is raised from 4.2 to 4.6%. | 21:13 | |
The second figure is raised from 0.2 to 3.2% by much more. | 21:18 | |
But nonetheless, even in these figures, | 21:23 | |
which received the major attention | 21:25 | |
from the Fed's statisticians, | 21:28 | |
there is still is a distinct an depreciable | 21:30 | |
retardation in the rate of growth in the last three months. | 21:32 | |
If you look at other figures, the shift is much sharper. | 21:35 | |
If you take currency, plus demand deposits, | 21:37 | |
plus commercial bank time deposits, | 21:40 | |
but exclude the large CDs, so as to eliminate | 21:42 | |
the bookkeeping affects from the shifting of CDs | 21:45 | |
from the U.S. to Euro dollar market, | 21:47 | |
you'll have that the rate of rise | 21:50 | |
in the December to April period was 4.3% | 21:52 | |
and April to July 0.7%, so you'll have | 21:56 | |
just about as large a shift as you had before. | 21:59 | |
If you look at the monetary base, member bank reserves, | 22:02 | |
unborrowed reserves, whatever other figure you look at | 22:04 | |
they all show a very distinct retardation | 22:07 | |
in the period from April to July | 22:11 | |
compared to the earlier period. | 22:13 | |
So my own conclusion is that in fact, | 22:14 | |
the Fed has appreciably tightened | 22:18 | |
the screws in the last few months. | 22:21 | |
Now, whether they will continue that tightness | 22:22 | |
is another question and on that I am much less certain. | 22:24 | |
Interviewer | We have a number | 22:30 |
of questions from subscribers. | 22:31 | |
Let's take them up one at a time. | 22:33 | |
In an earlier tape, you mentioned that banks | 22:36 | |
were persuading customers who had CDs | 22:40 | |
to transfer these sums to deposits | 22:42 | |
in their foreign branches. | 22:45 | |
Can an American investor place his money | 22:47 | |
in foreign branches of domestic banks | 22:49 | |
and thus receive the current Euro dollar | 22:52 | |
rate of interest on those deposits? | 22:54 | |
Milton | Yes, he can. | 22:56 |
But before you all rush to put envelopes in the mail, | 22:57 | |
let me point out a couple of features | 23:01 | |
that may make it less accessible than it might seem. | 23:03 | |
In the first place, the Euro dollar | 23:06 | |
CD market is a wholesale market. | 23:09 | |
The typical unit of transaction is a million dollars | 23:11 | |
and if you're thinking of sending a mere $50,000 or $100,000 | 23:16 | |
over to get the benefit of the Euro dollar rates, | 23:19 | |
it's very dubious that anybody will do business with you. | 23:21 | |
You'll be too small a fish. | 23:24 | |
So, it is a wholesale market in which the transactions | 23:26 | |
are on very, very large sums. | 23:29 | |
In the second place, if you're an American corporation | 23:32 | |
subject to the limitations on foreign investment | 23:36 | |
which were first introduced by President Johnson | 23:40 | |
on New Year's Day of 1968, in which unfortunately, | 23:44 | |
have been eased but not eliminated | 23:48 | |
by the Nixon administration, | 23:49 | |
why then your deposit into a Euro dollar bank | 23:52 | |
will be counted as a transfer of funds | 23:55 | |
out of the country and into a foreign investment | 23:57 | |
and therefore, will come under those requirements. | 24:02 | |
Now subject to those two conditions, | 24:05 | |
to the best of my knowledge, there is nothing whatsoever | 24:10 | |
to prevent any American citizen from transferring funds | 24:12 | |
from a New York or from a U.S. bank. | 24:17 | |
I keep saying New York because of course, most of the banks | 24:20 | |
involved in this business are in New York, | 24:23 | |
but there's nothing to prevent any American citizen | 24:25 | |
from transferring his funds from a U.S. bank | 24:27 | |
to a branch of the same bank | 24:30 | |
in London, or Paris, or some other country. | 24:32 | |
Interviewer | Second question. | 24:36 |
For the purpose of determining changes in the money supply | 24:37 | |
which figures should one observe? | 24:41 | |
Seasonally adjusted or not seasonally adjusted? | 24:43 | |
Milton | Now that's a very, very pertinent | 24:46 |
and very good question, and it's much harder to answer | 24:48 | |
than it might seem first place. | 24:52 | |
And let me see if I can give a simple answer first | 24:56 | |
and then elaborate on it a little. | 25:00 | |
As things now stand, you should look | 25:02 | |
at the seasonally adjusted figures. | 25:04 | |
In an ideal world, in my opinion, | 25:05 | |
what the Feds should control is not the seasonally adjusted | 25:08 | |
figures, but the seasonally unadjusted figures. | 25:11 | |
Now, the reason I say this is because a seasonal | 25:14 | |
in the money supply figures is a rather funny thing. | 25:18 | |
The money supply figures are whatever | 25:21 | |
the Fed decide they should be | 25:24 | |
and therefore, the seasonal in the money supply figures, | 25:26 | |
seasonal movement, is not like, let us say | 25:29 | |
a seasonal in crop production. | 25:32 | |
A seasonal in crop production, the amount | 25:34 | |
of wheat produced in different months of the year, | 25:35 | |
reflects a real physical frank, namely the fact | 25:37 | |
that temperatures, rainfall, and so on are different | 25:40 | |
at different parts of the year. | 25:42 | |
It's not something dominated by man's own actions. | 25:43 | |
But the seasonal in the money supply is very different. | 25:48 | |
It is dominated by what the Fed does. | 25:50 | |
It wouldn't be there if the Fed weren't doing it. | 25:53 | |
Now, how does the Fed put a seasonal | 25:56 | |
into the money supply figures? | 25:58 | |
Well, in the main it doesn't, not directly, | 26:00 | |
it doesn't calculate the seasonal | 26:02 | |
it wants to put in the money supply figures, | 26:04 | |
but because it has always emphasized orderly movements | 26:06 | |
and interest rates, the seasonal in the money supply figure | 26:11 | |
is an indirect consequence of the Feds trying | 26:15 | |
to lower the seasonal interest rates. | 26:18 | |
When Anna Schwartz and I wrote our book | 26:22 | |
on "Monetary History of the United States," | 26:24 | |
we compared the seasonal in money on the one hand | 26:26 | |
and in the interest rates on the other | 26:28 | |
before the Federal Reserve System was established in 1914 | 26:30 | |
and in that heyday of the Fed, during the 1920's. | 26:34 | |
And the results were very fascinating. | 26:38 | |
Before 1914, there was a very small | 26:41 | |
seasonal in the money supply. | 26:43 | |
At that time it was produced by the seasonal movements | 26:44 | |
in gold from abroad as a result of crop movement season. | 26:47 | |
There was a very wide seasonal | 26:50 | |
in interest rates over the course of the year. | 26:52 | |
I say very wide, I don't mean very wide, | 26:54 | |
a noticeable appreciable one. | 26:56 | |
In the 1920's the seasonal in interest rates | 26:58 | |
was very much smaller, almost eliminated. | 27:01 | |
The seasonal in the money supply was correspondingly wider. | 27:03 | |
With the result that you had substituted | 27:06 | |
the one seasonal for the other. | 27:09 | |
Now, given that the Fed is doing this, | 27:11 | |
why then the markets are all adjusted to the fact | 27:14 | |
that the Fed is introducing this season in the money supply | 27:16 | |
and therefore, a move which is regarded and interpreted, | 27:20 | |
and handled as seasonal, not explicitly, but implicitly | 27:26 | |
has no affect, and that is why under present circumstances, | 27:29 | |
with present practices, one should look at seasonally | 27:32 | |
adjusted figures for forecasting the course of events. | 27:36 | |
On the other hand, in an ideal world, | 27:39 | |
if the Fed stopped worrying about interest rates, | 27:41 | |
if it turned its attention only to the money supply, | 27:44 | |
its task would be much easier, | 27:47 | |
there would be less of an arbitrary and erratic element | 27:49 | |
if the Fed controlled and guided itself | 27:52 | |
by the seasonally unadjusted money supply. | 27:55 | |
Interviewer | Thank you very much, Professor Friedman. | 27:58 |
Remember subscribers, if you have any questions or comments | 28:00 | |
for topics you would like to hear discussed in this series, | 28:04 | |
please send them to Instructional Dynamics Incorporated | 28:07 | |
166 East Superior Street, Chicago, Illinois 60611. | 28:10 | |
Dr Friedman will be visiting with you again in two weeks. | 28:17 |
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