Tape 179 - Chile, 1976 Economic Conditions, Prime Rate, Monetary Policy

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-	Hello, this is William Clark of the Chicago Tribune,	0:02
	saying welcome again on behalf of Instructional Dynamics	0:04
	to a visit with the distinguished economist	0:08
	Professor Milton Friedman of the University of Chicago.	0:10
	We're recording this visit	0:13
	in the waning days of October 1975.	0:14
	And Milton, before we get into	0:19
	more profound economic subjects,	0:21
	I must comment that I read a column	0:24
	in the last few days in the Wall Street Journal,	0:26
	their "Notable and Quotable" feature,	0:29
	which was written by you,	0:31
	which referred to your recent visit	0:33
	some months ago to Chile,	0:37
	and apparently to some criticism	0:39
	that has been made since of that visit.	0:41
	I think your subscribers would like to know	0:42
	some of the background of that.	0:44
-	Well, the background of it is the following.	0:47
	As my subscribers recall, I spent about a week	0:49
	in Chile in early April.	0:52
	I was down there under the auspices	0:57
	of a private banking group.	0:58
	But in a country like Chile,	1:00
	which is being run tightly by the Junta,	1:01
	the distinction between private	1:04
	and public is not very important.	1:05
	And while we were down there,	1:07
	Al Harberger and I from the University of Chicago	1:09
	were both down there.	1:12
	While we were down there, we talked to a great many people,	1:13
	learned a great deal about Chile,	1:17
	gave some public talks,	1:19
	did talk to the General Pinochet	1:21
	and other people of the ruling junta	1:24
	about the problems of Chile.	1:26
	The overwhelming problem with Chile, of course,	1:28
	was the rate of inflation running at 20% a month,	1:31
	which was destroying the economy.	1:34
	Chile has since undertaken some rather rigorous policies	1:36
	directed at reducing the rate of monetary growth	1:41
	and cutting the government budget.	1:43
	These have brought the rate of inflation	1:45
	from 20% down to under 10% a month.	1:48
	They've cut them in half	1:50
	in the course of three or four months,	1:51
	which is very significant,	1:53
	but it has involved the price	1:55
	of a temporary increase in the rate of,	1:57
	we hope it's temporary,	2:00
	of an increase in the rate of unemployment.	2:01
	There is no way to avoid that.	2:02
	The Chilean government has introduced	2:04
	emergency programs of assistance,	2:06
	essentially make work programs at very low wages	2:08
	in an attempt to ease some of the immediate problems	2:11
	of the transition.	2:15
	How it will work out in the longer run remains to be seen.	2:16
	I hear from people in Chile	2:19
	that they are not absolutely sure	2:22
	that they still have the quantity of money under control;	2:23
	whereas the quantity of money was rising	2:26
	at over 20% a month earlier,	2:28
	it's now still going up.	2:31
	It's something over 10% a month,	2:32
	and this apparently has to do with their inability	2:34
	to get the government budget under effective control.	2:37
	At any rate, that's the background of it.	2:41
	Now, the particular letter in the Wall Street Journal	2:43
	derives from a different aspect of it.	2:45
	Not long after we got back,	2:47
	I started to get letters from a number of people	2:51
	criticizing me very severely	2:53
	for having been willing to go to Chile	2:56
	and been willing to give advice	2:58
	to a repressive and undemocratic regime,	3:00
	such as the military junta.	3:04
	In particular, I got a series of rather abusive letters	3:06
	from an old friend of mine, an Austrian,	3:09
	who had been a refugee from Austria when Hitler came in,	3:13
	had taught at various universities in the United States,	3:17
	had returned to Austria about six or seven years ago,	3:20
	and is very definitely way over on the left.	3:23
	He wrote me letters asking whether I didn't want him	3:27
	to send me a picture of Hitler to display on my wall	3:29
	because after all,	3:33
	for me to go down and talk to General Pinochet	3:34
	was equivalent to being a defender	3:35
	and a promoter of Hitlerian policies.	3:38
	Well in response to this letter	3:40
	I wrote him a private letter,	3:42
	which is what essentially has been republished	3:45
	in the Wall Street Journal.	3:47
	The way that came into the public print	3:48
	was that sometime later, Anthony Lewis of the New York Times	3:50
	wrote a column about Chile,	3:54
	in which he criticized strongly the trip which I had made,	3:56
	and in particular, said that the policies we had recommended	4:02
	were being imposed.	4:06
	I must say he gave him and me a great deal more credit	4:08
	for bringing those policies around than is deserved.	4:11
	You must realize that no advisor of any kind	4:15
	really determines a policy anywhere.	4:17
	The coincidence between the kind of an advisor	4:21
	and the policy depends more on the choice of the advisor	4:24
	than it does on what the advisor says.	4:26
	At any rate, he argued and raised the question of whether	4:28
	it was in accord with ethical standards of an academic	4:33
	to give advice to a government in Chile.	4:37
	This, in turn, was picked up by various groups,	4:42
	and in particular, by the last remaining remnant	4:45
	of the very left-wing SDS group	4:48
	on the University of Chicago campus,	4:51
	a relic from the 1960's.	4:54
	This group which calls itself the Young Spartacist League	4:56
	is a small group of Marxist revolutionaries.	4:58
	Very few of them are in fact students at the university.	5:03
	They draw most of their support	5:06
	from Circle Campus of the University of Illinois	5:09
	or from Roosevelt College or from other places	5:12
	outside the campus.	5:14
	At any rate, they are in their dying days,	5:16
	and they are anxious and desperate for any kind of issue	5:20
	in which they can arouse people.	5:23
	So they picked up this issue	5:24
	and they put out big posters saying	5:26
	drive Milton Friedman off the campus,	5:28
	or he's a fascist beast for going down	5:30
	to advise the Chilean government.	5:33
	Now one of the amusing paradoxes of it is	5:36
	they were trying to drive me off the campus	5:39
	for advising a government on the grounds	5:41
	that that government was stifling academic freedom in Chile.	5:44
	At any rate, this group did hold one or two	5:48
	public protest meetings which were very sparsely attended.	5:51
	They did get a resolution put up	5:56
	before the student government of the University of Chicago	5:58
	which I am delighted to say the student government rejected.	6:02
	This was a resolution of censure	6:05
	against Harberger and myself,	6:07
	which was rejected by the student government by a vote	6:09
	of something like 40 or 50 to 12 or 15,	6:13
	or something of that order, overwhelmingly.	6:15
	The student newspaper, The Chicago Maroon,	6:20
	of course got after me immediately	6:22
	upon this business developing,	6:23
	and I thought that the best course	6:26
	was not to respond specifically	6:27
	to the Young Spartacist League.	6:30
	I don't want to let them determine my activities,	6:31
	but instead, I took out of my files my carbon of the letter	6:33
	which I had written to my Austrian friend	6:37
	and gave it to the Maroon to publish,	6:40
	and that's what Wall Street Journal republished.	6:42
	Now I may say that there is a very real issue involved.	6:44
	Obviously, the question is that there are circumstances	6:47
	under which it would be immoral to participate in	6:51
	or to cooperate with or seem to give some credit	6:56
	to a repressive regime,	6:59
	but it's not an easy question to answer.	7:01
	In our particular case, it's complicated by the fact	7:03
	that over the course of years,	7:06
	we have had many Chilean students	7:07
	who have earned their Ph.D.'s from us.	7:09
	This is as a result of a cooperative program	7:11
	which we had with the Catholic University of Chile,	7:13
	funded if I recall right by the Forward Foundation	7:15
	and also maybe by USAID funds.	7:18
	As a result, probably the largest group	7:22
	of trained economists of Chilean extraction	7:24
	are University of Chicago Ph.D.'s.	7:27
	Some of them have become refugees from Chile	7:30
	under the present government,	7:33
	but some of them decided that they could contribute	7:35
	more to their country by staying	7:37
	and working within the government.	7:39
	Now the question is, what responsibility do we	7:41
	as their teachers have to this?	7:43
	We supported them during the unity period,	7:45
	I think we have an obligation to support and advise	7:48
	those who have left Chile.	7:52
	But I think we also have an obligation to support	7:55
	and back up those who have stayed in Chile.	7:57
	Moreover, it's a very difficult thing	8:01
	to know what the alternatives are.	8:02
	You have only a choice at the moment in Chile	8:04
	between a repressive junta and what I think	8:06
	would have been an even more repressive	8:10
	and unalterable totalitarian Allende regime.	8:12
	Are the chances of getting back to a democratic society	8:17
	improved or worsened by good economic policy?	8:20
	I think they clearly are improved.	8:22
	So I have no apologies to make.	8:24
	The thing that impresses me is the double standard	8:27
	which is applied to these matters.	8:30
	As I say in the letter,	8:32
	I have advised the government of Yugoslavia	8:33
	with never having gotten a peep from it.	8:35
	(William chuckles)	8:38
	And the fundamental thing which this illustrates	8:39
	is a long-standing phenomenon,	8:42
	which is that there is a bias	8:45
	in intellectuals' communities' attitude.	8:46
	To be expressed by the fact	8:48
	that there are no enemies on the left.	8:50
-	Thank you very much Milton.	8:52
	I know a number of your subscribers	8:53
	will have read that piece in the Wall Street Journal	8:55
	and will be very much interested in this background comment.	8:57
	Now I have been reading a column written for Newsweek	9:00
	back in February of this year by yourself Milton Friedman,	9:05
	which reads in part as follows.	9:10
	"Most current talk about the 1976 presidential race	9:13
	"takes it for granted that President Ford	9:17
	"will be severely handicapped by the state of the economy.	9:18
	"That then as now, now being February of this year,	9:21
	"he will be saddled with high inflation,	9:25
	"high unemployment, and high oil prices.	9:27
	"My crystal ball suggests precisely the opposite.	9:29
	"The state of the economy in 1976 will be	9:32
	"a strong plus for President Ford," and so forth.	9:35
	I wonder do you still feel that way at this point in time?	9:39
-	Yes, I still do.	9:43
	I don't believe that the past seven or eight months	9:44
	has altered fundamentally that picture,	9:49
	but on the contrary, it has tended to confirm it.	9:50
	Indeed, later on in that column,	9:53
	in talking about the end of the recession,	9:57
	I said the turning point is coming later	10:00
	than it actually came.	10:03
	In fact if anything, the developments since then	10:04
	have been much more positive from the point of view	10:08
	of improvement in the economy over the short run	10:11
	than they were at that time.	10:14
	Therefore, I think the odds still are	10:17
	that in 1976, the economy will be improving	10:20
	in the sense that unemployment will be going down,	10:23
	the rate of inflation will be tapering off	10:26
	or staying steady, at least it will not be accelerating;	10:29
	and I still stick to the view that I expressed then,	10:32
	that there's a significant chance that by 1976,	10:35
	the OPEC oil cartel will be disintegrating	10:40
	in an even more visible form	10:42
	than it has already shown signs of disintegrating.	10:45
	All of those factors will therefore be working favorably	10:47
	for President Ford in the election.	10:50
	Obviously, that doesn't mean he's gonna be elected.	10:52
	That's another question.	10:54
	I think that the naive notion	10:55
	that economic conditions alone determine elections	10:57
	cannot be supported from the evidence.	10:59
-	Thank you, that's a very interesting	11:02
	and I think for most of us, an encouraging prospect.	11:05
-	I may say one thing which I think it does bring out	11:08
	of a rather different kind, Bill,	11:10
	is the need for some sense of perspective in these matters.	11:12
	Back in January or February of this year,	11:15
	there was an enormous wave of pessimism.	11:19
	We're entering into a major depression.	11:21
	We're going to relapse into a 1929-33 situation.	11:23
	Well, we need to pull out all stops	11:28
	in order to get out of it.	11:30
	That was the kind of atmosphere and attitude	11:31
	around the early part of this year.	11:33
	It wasn't justified then, as is clear from	11:36
	the statements I was making in this column.	11:38
	Therefore, I think the important thing for all of us to do	11:43
	is to try to take a somewhat longer view	11:45
	and not get tied up in this tendency	11:47
	to look two months ahead.	11:49
	It's understandable that Wall Street and Washington	11:51
	has that short a perspective,	11:53
	but the rest of us out here in the boondocks,	11:55
	we don't have to be infected by the hysteria	11:57
	which emanates from the canyons of Wall Street	12:01
	and from the smoke-filled rooms of Washington.	12:03
	Try to keep a sense of perspective	12:05
	and not let ourselves be driven by momentary feelings.	12:07
-	I like that.	12:11
	Milton, in the last few days	12:12
	there have been some reductions in the prime rates.	12:14
	What does this foreshadow, as far as you're concerned?	12:18
-	I believe that this will turn out	12:21
	to be a very temporary phenomenon.	12:22
	It may last a few months.	12:24
	I believe in large part,	12:26
	the reductions in the prime rate and the short-term rates	12:28
	are an indirect consequence	12:31
	of the New York financial situation.	12:32
	The uncertainty of New York City's financial condition	12:37
	has had two effects, both of which	12:40
	have tended to drive down short-term interest rates.	12:42
	The first effect arises out of the fact	12:47
	that whenever there's great uncertainty,	12:49
	this is exactly what happened	12:51
	at the time of the Penn Central disaster in 1970.	12:52
	It's what happened when there have been	12:56
	other financial emergencies.	12:59
	Whenever there is a great increase in uncertainty,	13:01
	there is an attempt by people to become liquid.	13:03
	How do people become liquid?	13:06
	By trying to move from long-term securities	13:08
	to short-term securities in their assets.	13:10
	Therefore, the effect of uncertainty	13:13
	is to steepen the yield curve.	13:15
	That is to say, to make the differential	13:18
	between rates on short-term securities	13:21
	and rates on long-term securities	13:23
	larger than it otherwise would be.	13:25
	If you look at what's been happening to interest rates,	13:26
	long-term interest rates haven't come down particularly.	13:29
	They've stayed roughly the same.	13:31
	It's short-term interest rates that have come down.	13:33
	That's the effect of this desire for liquidity.	13:35
	The second effect of the New York crisis,	13:38
	which I think I mentioned in an earlier tape,	13:41
	is that by drying up the municipal market,	13:44
	by making people hesitant about putting money	13:46
	into the municipal market without altering	13:48
	the total amount of funds available for investment,	13:50
	is has tended to divert funds to the other securities.	13:52
	To federal securities, to private securities, and the like.	13:57
	That in turn, has tended to drive down the whole structure	14:00
	of rates of interest on private security.	14:03
	The two have reinforced one another in this respect,	14:07
	and I think are primarily responsible	14:10
	for the decline in the rate of interest	14:14
	that we've seen in the prime rate.	14:20
	Now this, in turn, given the way,	14:22
	and we may come back to this,	14:25
	but given the way in which the Fed operates,	14:26
	this, in turn, helps explain	14:28
	the extremely restrictive monetary policy	14:30
	of the Fed in the last few months.	14:32
	As this is turned around, we may have for a couple of months	14:34
	a continuation of relatively low short-term rates.	14:39
	I say relatively low.	14:43
	7 3/4% percent is not exactly	14:44
	what at one time we would have called a low rate.	14:46
-	That's right.	14:48
-	But at any rate, you may have softness on the rates.	14:49
	But as and if as I believe will happen,	14:52
	the economy picks up and the recovery gathers steam,	14:56
	that will be reversed.	14:59
	And I think if you look down the line	15:00
	four, five, six months from now,	15:02
	the prime rate will not stay where it is.	15:04
	It will tend to go up.	15:06
	The only thing that in the long run	15:07
	will drive down those rates,	15:09
	is a very significant and	15:10
	continued decline in the rate of inflation.	15:15
	May I hope that's in the offering, but I wouldn't bet on it.	15:18
-	Allude to monetary policy, and if I'm not mistaken,	15:23
	Chairman Burns, Arthur Burns is to testify	15:25
	before the Senate Banking Committee	15:28
	within a day or two regarding the resolution	15:29
	requiring the Fed to specify monetary policy,	15:33
	and that you are going to testify about week after that.	15:36
	I wondered if you would give us a little background	15:41
	and maybe a little forecast of what you plan to say.	15:43
-	Well, as you recall, the concurrent resolution	15:46
	which was passed by Congress last spring,	15:51
	requires the Fed to report supposedly once every six months	15:53
	about what its projected targets for monetary growth	15:57
	are for the next year.	16:00
	Now the the average six months	16:02
	has turned into every three months,	16:03
	because the House Committee	16:05
	wants to have them every six months,	16:06
	and the Senate Committee wants to have them every six months	16:07
	so it's turned out to be every three months.	16:10
	This time it's the Senate Committee's turn	16:13
	with William Proxmire in the chair,	16:18
	and Arthur Burns is to testify this week on his targets.	16:19
	I don't know what he's going to say	16:24
	but I would be willing to wager	16:26
	that he will stick pretty much by roughly the same targets	16:28
	that he's stated earlier:	16:33
	5-7.5 % for M1, 8.5-10.5% for M2.	16:34
	Now if you look at actual performance,	16:38
	what happened is that the Fed, as I reported here,	16:40
	was in July, above the upper limit of its objectives.	16:44
	When Arthur Burns testifies,	16:50
	the Fed will be below its lower limit.	16:52
	It has swung from a very rapid expense	16:54
	into a very restrictive policy.	16:57
	That is why I say in the past from July to now,	17:00
	the rate of growth of M1 has been essentially zero,	17:04
	it had been flat.	17:06
	Now, what this brings out, in my opinion,	17:08
	is that the big problem in Federal Reserve policy	17:12
	is no longer the objectives they are seeking,	17:14
	but the techniques by which they are trying	17:16
	to attain those objectives.	17:18
	I believe that that congressional resolution,	17:21
	for reasons I've explained on these tapes earlier,	17:23
	has been a major in a very important	17:25
	and very salutary change in monetary policy.	17:26
	For the first time, it forces the Fed	17:29
	to reach long-term targets, to set long-term targets,	17:30
	to state them publicly, and to be held accountable for them.	17:35
	The real problem is, and I have very little quarrel	17:38
	with the objectives they've stated.	17:41
	Personally, I would have had somewhat lower rates of growth,	17:43
	but on the whole it's in the right ballpark.	17:46
	But I believe that the performance	17:49
	has not matched the objectives.	17:51
	The objectives have been good;	17:54
	the performance has been terrible.	17:55
	Why?	17:56
	Fundamentally, because the Fed continues to try	17:57
	to control the money supply by techniques	18:01
	which were developed for a wholly different purpose,	18:04
	namely, to control interest rates.	18:06
	The way in which the Fed operates, as you all know,	18:08
	is that it has a money supply target	18:11
	let's say of 6% for next month,	18:13
	it gets its staff to convert that	18:15
	into what federal funds rate is estimated to be required	18:17
	to keep the monetary growth at 6%,	18:22
	and it then instructs New York	18:25
	to keep the federal funds rate there.	18:28
	Now the problem with what is,	18:30
	that it's logically, in principle,	18:31
	a possible way to operate.	18:34
	There is at each moment of time a federal funds rate,	18:36
	at which the amount, the number banks would wish	18:39
	to add to their reserves would be just the right amount	18:42
	in order that the money supply	18:45
	should increase at the desired level.	18:46
	As you can see, there are many slips	18:48
	'twixt that cup and the lip.	18:50
	There are two major slips.	18:51
	The first is that the Fed is very bad	18:54
	at estimating what the required interest rate is.	18:56
	The reason they're bad is because there are many forces	18:59
	going on in the interest rate market	19:02
	that they have no control over.	19:04
	As for example, I've just been describing	19:05
	these effects of New York.	19:06
	It's because of these effects of New York	19:08
	that they have misestimated	19:10
	what federal funds rate they want,	19:11
	and they have set the federal funds rate too high.	19:14
	But the second slip is even more important.	19:16
	It is that if they make a mistake,	19:18
	the mistake tends to be reinforcing	19:20
	and to be cumulative to drive them away.	19:23
	It's like trying to keep an egg standing on its pointed end.	19:25
	You can do it in principle,	19:30
	but you have to do an awful lot of fine-tuning	19:31
	to keep it there.	19:32
	And they are in exactly that position,	19:33
	because what happens?	19:35
	Suppose they set the rate too low	19:37
	as they did earlier this year.	19:40
	They set it too low because they didn't figure	19:43
	on the figure of the expense.	19:45
	They set it too low; the market is trying to drive it up.	19:46
	In order to hold it down, they have to print money.	19:50
	They have to create money.	19:52
	They have to add to reserves.	19:53
	This intensifies the boom,	19:55
	and intensifies the forces driving the rates up,	19:57
	and if they kept that rate there,	20:00
	the only way they could do it	20:02
	would be by letting money grow indefinitely.	20:03
	That's what ultimately killed the bond support program	20:05
	during World War II.	20:09
	Now on the other hand, if they set it too high,	20:11
	then they have to pull money out	20:14
	and they drive you into a deflate.	20:15
	Of course, they don't stick to the rate.	20:17
	When they finally get persuaded	20:18
	they've gone too far, they adjust.	20:20
	But then they have a strong tendency to adjust too far.	20:22
	That's why, in my opinion,	20:25
	throughout the history of the Fed for 62 years,	20:27
	the standard pattern has been one of swinging too far	20:29
	from one side of a monetary explosion	20:32
	to too far to the other side of a monetary contraction.	20:34
	There is an alternative method of operating	20:38
	that's perfectly accessible too,	20:39
	that has been proposed and recommended	20:41
	by people within the system.	20:43
	I've been arguing this way for at least seven years.	20:45
	Before Arthur Burns was chairman,	20:51
	I wrote to William McChesney Martin	20:52
	trying to persuade him to have a joint research project	20:54
	between my group at the University of Chicago	20:58
	and some of the Federal Reserve people,	21:00
	to develop an alternative technique	21:02
	for controlling the money supply.	21:04
	He wouldn't go along because he said to me then,	21:06
	"Oh, we know how to control the money supply.	21:09
	"That's not an issue.	21:11
	"The only issue is do we want to control the money supply."	21:12
	Well in 1970, they decided they wanted	21:15
	to control the money supply.	21:17
	It's five years later,	21:18
	and they still have not adjusted their procedures.	21:19
	The alternative procedure would be for it	21:22
	to forget about federal funds rate altogether,	21:24
	and simply ask how much high-powered money,	21:26
	how much additional reserves do we have	21:30
	to feed into the system in order to able	21:32
	to get the monetary growth we want?	21:36
	There still are errors in that.	21:38
	It will not be precisely accurate.	21:40
	And it might be even that for a month or two ahead	21:43
	it would be no more accurate than the present system.	21:45
	But it has the overwhelming advantage	21:47
	that the errors would be random and offsetting,	21:49
	and would not have this same tendency to cumulate.	21:52
	It would be like laying the egg down on its side,	21:54
	instead of on its point.	21:57
	The burden of my testimony before the Senate	21:59
	will be to try to stress the importance	22:02
	of having the Federal Reserve shift its mode of operations.	22:05
	Now as to what's actually going to happen,	22:07
	I think the Fed is under enormous pressure	22:10
	to reverse its recent highly restrictive policy,	22:12
	and I think it will do so.	22:16
	But I'm afraid that we'll once again	22:18
	jump to the other extreme,	22:20
	and that what we will experience	22:21
	over the next four or five months	22:23
	is another monetary explosion,	22:24
	with rates of growth decidedly higher	22:26
	than the Fed has set as its objective.	22:28
	That's why I continue to believe,	22:32
	as I did I may say when I wrote that column	22:35
	in February that you referred to,	22:37
	that the real danger, not for 1976, but for 1977 and 78,	22:38
	is accelerated inflation	22:44
	rather than a relapse into another recession.	22:45
-	Doctor Friedman, we have a letter	22:49
	we encourage our subscribers to write in	22:50
	to suggest questions and subjects,	22:52
	and it seems like we have trouble getting to them.	22:54
	But here's one which from Gary Glynn	22:57
	of Brooklyn, New York which reads as follows:	23:01
	Dear Doctor Friedman, would you please comment	23:04
	on Professor Friedrich Hayek's theory	23:06
	that general economic stimulus has resulted in a	23:08
	misallocation of labor and capital,	23:10
	leading to the necessity of our either	23:13
	having to have accelerating inflation	23:16
	followed by severe unemployment later,	23:18
	or bad unemployment now.	23:20
	Specifically in his recent occasional paper	23:23
	published by the Institute of Economic Affairs,	23:25
	he says that you have not properly accounted	23:27
	for this microeconomic phenomenon	23:29
	in your policy recommendation of steady,	23:32
	moderate money supply growth.	23:34
-	Well on the whole, I share very much	23:37
	Professor Hayek's view about the problems	23:41
	for the immediate future,	23:44
	but I believe the difference between his views and mine	23:47
	are while real, can readily be exaggerated.	23:51
	There is no doubt, that not general economic...	23:58
	Well, let me go back.	24:01
	I think the fundamental point of difference	24:02
	is that what I stress is the importance of monetary growth	24:05
	in excess of the amount people anticipate.	24:09
	It is my argument that if you had money growing at any rate	24:13
	and everybody anticipated it,	24:17
	if money were growing at 10 or 15% per year,	24:20
	and everybody expected that,	24:23
	then prices would be rising	24:25
	perhaps at 10% a year or 12% per year.	24:26
	Everybody would expect that.	24:28
	All interest rates would be	24:30
	10 or 12 percentage points higher.	24:31
	Everybody would adjust to that.	24:33
	You would have a waste in changing price tickets	24:37
	and the like, but there would not be in that case	24:39
	any major misallocation of labor and capital.	24:41
	On the other hand, when monetary growth	24:44
	is different from what people expect,	24:47
	when it's faster than people anticipate	24:49
	or slower than people anticipate,	24:51
	then you do have the misallocation of labor and capital	24:53
	that Professor Hayek is talking about.	24:56
	He stresses the absolute rate of growth	25:00
	while I stress the difference between the rate of growth	25:02
	and the rate anticipated,	25:05
	and that's what leads to our different conclusions.	25:07
	Now under the present circumstances where we are now,	25:09
	it follows from what I've been saying	25:12
	that once people have been adjusted to an inflation,	25:13
	you cannot get to a lower level of inflation,	25:16
	without unemployment in the process	25:19
	or without misallocation in the process.	25:22
	Similarly, if you accelerate inflation,	25:24
	you can maintain employment,	25:27
	but only by encouraging a further misallocation	25:29
	of labor and capital as he says.	25:32
	Thus, I do not believe that my policy recommendation	25:34
	of steady moderate monetary money supply growth	25:37
	is really fundamentally inconsistent	25:40
	with his predictions about what has happened	25:43
	from a policy which differs in respect	25:46
	of being unsteady and immoderate.	25:49
-	Thank you very much Professor Friedman.	25:52
	If you subscribers would like to pose questions	25:53
	for Doctor Friedman to answer	25:56
	or subjects for him to discuss on future tapes,	25:57
	please write your suggestions	26:01
	to Instructional Dynamics Incorporated,	26:02
	450, that's 4-5-0 East Superior Street, Chicago 60611.	26:05
	We'll be visiting with Doctor Friedman again	26:13
	a couple of weeks hence.	26:15

Item Info

Title:

Tape 179 - Chile, 1976 Economic Conditions, Prime Rate, Monetary Policy

Contributor:

Friedman, Milton, 1912-2006

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English

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Paul A. Samuelson papers, 1933-2010 and undated

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Paul A. Samuelson papers, 1933-2010

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Economics Cassette Series: Milton Friedman

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samuelsonpaul
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ark:/87924/r45t3gg41
654b004c-dd50-4591-84b1-1f5afdae6238

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Tape 179 - Chile, 1976 Economic Conditions, Prime Rate, Monetary Policy

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