Tape 122 - Adam Smith, Controls, Dollar and Gold, Watergate and the Economy

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-	Hello, this is Rose Friedland inviting you	0:02
	on behalf of Instructional Dynamics	0:05
	to another of our biweekly interviews with Milton Friedman,	0:07
	Professor of Economics at the University of Chicago.	0:11
	We are taping this interview on June 6, 1973.	0:14
	We are a day late for a momentous birthday.	0:19
	Adam Smith was born 250 years ago.	0:22
-	250 years ago yesterday.	0:26
	On June 5th, and a birthday celebration	0:28
	was being held yesterday in Kirkcaldy, Scotland	0:31
	which is the birth place of Adam Smith,	0:36
	a small town on the eastern coast of Scotland,	0:38
	where we visited quite a number of years ago.	0:43
	It is in some ways amusing and some ways appropriate	0:48
	that one of the talks being given	0:52
	at the Adam Smith Birthday Celebration	0:56
	is by Arthur Burns, the chairman	0:58
	of the Federal Reserve System.	1:00
	The reason why it's appropriate	1:02
	is because one of the few lapses	1:03
	in Adam Smith's analysis was with respect	1:06
	to usury legislation, I am sorry	1:11
	to have to report that Adam Smith	1:13
	had a few kind words to say	1:15
	about legislation fixing a maximum rate of interest.	1:17
	I may say he wrote before the famous pamphlet	1:22
	by Bentham in defense of usury, indeed,	1:25
	Bentham's pamphlet in defense of usury	1:28
	was partly stimulated by his reaction	1:31
	to Adam Smith's comments on the subject.	1:34
	At any rate, Arthur Burns, who in general	1:37
	has been a very strong and effective advocate	1:39
	of free enterprise and of Adam Smith's positions,	1:44
	at least he was so until he became governor	1:47
	of the chairman of the Board of Governors	1:49
	in the Federal Reserve System has in,	1:51
	as you all know, in the last couple of years	1:54
	in effect come out in favor	1:56
	of the the equivalent of usury legislation.	1:58
	The committee on the control of dividends	2:01
	and interest is a form of informal usury legislation,	2:03
	as I've commented many times, all the worse for that.	2:06
	I prefer that bad things be in the law	2:09
	rather than be enforced by extralegal thing.	2:12
	However, and more recently of course,	2:15
	he has pioneered the notion of a dual prime rate,	2:19
	of a dual lending rate by commercial banks,	2:25
	a lower rate to small customers	2:28
	and a higher rate to the big customers.	2:30
	A division like which most attempts	2:33
	to go against the basic laws of the market	2:36
	is bound to fail and cannot but produce confusion.	2:39
	Nonetheless, as I say it, it is somewhat appropriate	2:43
	that the weakest parts of Adam Smith's doctrines	2:46
	should have been in the field	2:51
	of money and of interest legislation	2:52
	and that Adam Smith should accordingly	2:54
	be commemorated on this occasion	2:57
	by Arthur Burns, who in all other respects	2:58
	is certainly a adamantly distinguished scholar	3:01
	and a highly appropriate commentator	3:04
	for the occasion.	3:06
	Adam Smith was a most remarkable man	3:09
	in many ways and I cannot refrain	3:13
	from urging all my subscribers to pick up the book	3:16
	by Adam Smith, The Wealth of Nations,	3:19
	a great book whose 200th anniversary	3:21
	will coincide with the 200th anniversary	3:23
	of the Declaration of Independence,	3:27
	that is the year will, and 1776	3:28
	was when the Declaration of Independence was signed	3:30
	and it was when The Wealth of Nations, appeared.	3:33
	Pick it up and turn almost at random	3:36
	within the book to any page and you will find	3:38
	that it is just as appropriate	3:41
	to today's circumstances as it was to his.	3:45
	I have just recently been preparing an article	3:49
	for the New York Times Sunday magazine section	3:51
	on voucher schemes in schooling, as you know,	3:55
	this is a scheme which I suggested	3:58
	some close to 20 years ago	4:01
	before the American context, the basic idea	4:05
	is that is to introduce competition and market,	4:08
	a market into schooling, to say	4:16
	that if a parent does not wish	4:19
	to send his child to a public school,	4:22
	he shall be entitled to receive a voucher	4:24
	equal to the amount of money that the community	4:26
	has committed to spending his child's schooling.	4:29
	In this way, parents would be able	4:34
	to decide about schooling the way	4:37
	they decide about groceries.	4:38
	If they don't like the schooling	4:40
	they're getting at a particular school,	4:41
	they can take their voucher and go to another school.	4:43
	Now, it turns out that in writing this piece,	4:46
	I found it appropriate to quote, verbatim,	4:50
	passages from Adam Smith	4:54
	in which he essentially proposed the same kind	4:56
	of an arrangement	4:58
	and in which he has some very encouraging things to say	4:59
	about schooling, about the factors	5:02
	that produce good schooling and bad schooling.	5:07
	For example, here's one sentence from Adam Smith,	5:08
	and I quote, those parts of education	5:12
	it is to be observed for the teaching	5:14
	of which there are no public institutions	5:16
	are generally the best taught, unquote.	5:19
	At first brush, that seems an extraordinary	5:23
	and absurd statement for our time,	5:28
	let alone for his, and yet if one stops	5:30
	to contemplate it, it turns out	5:33
	that it is as appropriate for our time	5:36
	as it was for his.	5:38
	Consider some of the subjects	5:40
	for which there are no public institutions.	5:43
	Teaching piano music, the kind of music lessons	5:46
	your children get by separate lessons,	5:49
	the teaching of dance, the teaching of car,	5:54
	of driving a car, consider the auto schools.	5:57
	Adam Smith goes on after his statement to say	6:01
	when a young man goes to a fencing	6:03
	or dancing school, he does not indeed	6:05
	always learn to fence or to dance very well	6:08
	but he seldom fails at learning fence or to dance.	6:10
	When exactly the same way many a young man	6:14
	who goes to a public school doesn't learn	6:17
	how to read but there is hardly a young man	6:20
	who goes to a school for automobile driving	6:22
	who doesn't learn how to drive.	6:26
	Or consider the schools for training mechanics,	6:28
	television repairmen, airplane flying,	6:31
	go down the list.	6:35
	If you look at private schools,	6:36
	they almost invariably succeed,	6:39
	as Adam Smith said, in teaching their students.	6:43
	On the other hand, public schools	6:46
	have no such reputation.	6:48
	Or and again, look at the training schools	6:51
	that private industries have set up	6:53
	for their own people, the kind of schools	6:54
	you have at General Electric, General Motors	6:57
	and elsewhere which are schools	6:59
	teaching skills for which there are no public institutions.	7:03
	Well, this is just an extremely small sample	7:06
	and my main point is only to remark	7:09
	how fresh and lively Adam Smith seems	7:11
	whenever you ever turn to him	7:14
	and read him today.	7:15
	Unfortunately, we need, his teachings,	7:17
	while they had a considerable effect	7:21
	in Britain in the 19th century	7:23
	and the United States in the 19th century,	7:25
	are increasingly being disregarded	7:26
	in the Western world today.	7:29
	We really badly need a new Adam Smith	7:31
	who has the same kind of eloquence,	7:34
	ability to write, ability to attract attention,	7:36
	could somehow or another bring	7:40
	the peoples of the world to their senses.	7:42
	It is incredible the kind of monumental folly	7:43
	that is being engaged in everywhere	7:47
	throughout the world.	7:48
	Here in the United States, the increasing,	7:50
	the increasing news stories to the effect	7:54
	that we are going to have more extensive	7:57
	and more detailed wage and price control,	8:01
	the phase four, five or six, whatever	8:03
	nonsensical number you want to use.	8:05
	It is hard to conceive of a more monumental folly.	8:08
	The freeze in 1971, followed by phase one,	8:11
	at least came at a time when there was	8:17
	some excess capacity.	8:20
	Output could expand.	8:23
	It at least came at a time when inflationary pressures	8:24
	if anything were declining.	8:26
	It came at a time when perhaps	8:29
	there was some hope of arguing	8:31
	that such a freeze could effect inflationary anticipations	8:34
	and one apparently it did to some extent.	8:39
	As you know, I was strongly opposed	8:42
	to the freeze at that time,	8:44
	in retrospect, I think my opposition	8:45
	was well taken, yet nonetheless,	8:47
	there were at least some things	8:50
	that could be said for it at that time.	8:51
	There is absolutely nothing to be said for it right now.	8:53
	We are operating at essentially full capacity	8:56
	of the economy.	9:00
	As a result, the effect of holding,	9:02
	forcing prices to be lower than the market prices	9:05
	can only be shortages	9:09
	over a ever widening range of goods.	9:11
	Already I am told the move toward setting ceilings	9:15
	on meat prices	9:20
	has caused a reduction in the number	9:22
	of animals that are being fed and as a result,	9:24
	spell a meat shortage or a more aggravated	9:28
	meat shortage in October of this year.	9:33
	The incredible notion that the way	9:36
	to keep prices from rising is simply	9:40
	to declare that they shall do so.	9:43
	The failure to distinguish between shortage	9:46
	in the sense, of shortage at a price,	9:50
	and some kind of a physical shortage.	9:53
	Again, let me go back to the meat case.	9:55
	From everything you read in the paper	9:57
	you would be sure that people	9:59
	must be consuming less meat than they did before.	10:00
	The truth of the matter is that meat consumption	10:03
	per capita in the United States	10:06
	is at an all time high.	10:08
	It is higher than it was a few years ago	10:09
	and the reason meat prices	10:12
	went up so fast was not that there was a physical shortage	10:13
	of meat, in the sense	10:17
	of less available than before,	10:19
	but they went up so high	10:22
	because of the extraordinary increase in demand	10:23
	as a result of increasing incomes,	10:26
	paper incomes, nominal incomes,	10:28
	and hence an attempt to upgrade diets.	10:31
	How is any of that going to be affected	10:36
	by an edict that the price of meat	10:39
	shall be held at some level?	10:41
	And what's true for meat is true	10:43
	for every other commodity.	10:45
	As I said before, we are essentially	10:46
	approaching the limits of physical capacity,	10:49
	so nothing very much can be gained in that way.	10:52
	At least, as I say in 1971 you could argue	10:54
	there was some gain that way	10:57
	but so far as in inflationary expectations	10:59
	are concerned, the old song about,	11:01
	you can fool all of the people some of the time,	11:05
	some of the people all the time,	11:07
	but you can't fool all of the people	11:09
	all the time seems to me to be pertinent.	11:10
	Maybe, in August '71, people were fooled	11:13
	into believing that a freeze	11:16
	was really serious, they're going to reduce the rate	11:17
	of price inflation.	11:20
	Having seen what happened on that occasion,	11:21
	are they now going to believe it again?	11:23
	Or all of the various surveys	11:25
	of consumer sentiment show that for the first time,	11:27
	there has been an extraordinary increase in hedge-buying,	11:32
	by consumers trying to get ahead	11:35
	of coming inflation.	11:37
	Consumer anticipations of inflation	11:38
	are at a far higher level than they were in mid '71	11:40
	and with considerable reason and justice.	11:44
	And yet, a majority of the US senators	11:49
	gathered together in democratic caucus	11:55
	vote unanimously to legislate a freeze	11:58
	in all prices, wages and consumer interest rates.	12:02
	Yet, the talk in Washington, not only	12:05
	on the Democratic side but on the Republican side,	12:09
	is that despite the opposition	12:12
	of some of the top economic advisors,	12:14
	like George Shultz and Herbert Stein,	12:16
	there is a significant chance that President Nixon	12:19
	will impose wider and more extensive wage and price control.	12:22
	Surely, we need an new Adam Smith today.	12:30
-	The headlines are still full	12:34
	of the dollar and gold.	12:36
	Would you like to comment on them?	12:38
-	Well, the interesting thing	12:40
	about these headlines is how they reinforce the kind	12:41
	of comment I made two weeks ago about the difference	12:45
	between what is really going on	12:48
	with respect to the dollar	12:49
	and with what the headlines said.	12:51
	I have a couple of more beautiful examples.	12:53
	Here is the story from The Wall Street Journal	12:55
	of Monday of this week which reads, quote,	12:57
	the US dollar took another tumble	13:01
	on international currency markets Friday.	13:04
	You read down to the end of the brief story	13:07
	and the last paragraph has some numbers	13:09
	by which you can compare that tumble.	13:11
	What happened?	13:13
	In London, the pound rose against the dollar	13:14
	to 2.5820 at one point, but slipped back	13:16
	to close around 2.5735,	13:20
	still well above Thursday's close at 2.5665.	13:24
	The tumble then, was a change in the closing quotation	13:29
	from 2.5665 to 2.5735.	13:32
	A decline in the value of the dollar	13:37
	was less than 1/4 of 1%.	13:39
	Here is the next day's Wall Street Journal headline,	13:42
	Dollar Dives Further.	13:45
	In Frankfurt, the dollar limped through one	13:49
	of its weakest days of the year,	13:52
	sagging to 2.610 marks to 2.674 marks	13:54
	at Friday's close.	14:00
	What a sag was there, or again,	14:02
	according to Morgan Guarantee Trust Company	14:05
	of New York, which has been keeping a daily tally,	14:07
	the dollar has plunged 8.84% against 14 currencies	14:10
	from the level set in December 1971.	14:16
	That is to say, in a year and a half,	14:21
	the price of the dollar in terms of other currencies	14:23
	has gone down 8.84%.	14:26
	That's a plunge.	14:29
	Now, as I emphasize then, part of the reason	14:32
	is because the adjectives all do	14:36
	is apply accurately to what's been	14:39
	happening to the price of gold.	14:40
	The price of gold over that period	14:43
	has risen from something like 70 to $80	14:44
	an ounce to something like $120 an ounce.	14:46
	That's a 50% rise or so	14:50
	and that really is soaring, or if you want,	14:52
	the value of the dollar in terms	14:55
	of gold has plunged, but in that sense,	14:56
	the value of the dollar in terms of soy beans	15:00
	has plunged far farther,	15:03
	because soy beans have something like	15:05
	quadrupled over the last year.	15:06
	Surely, what these gyrations in the price of gold	15:09
	and soy beans tell you is something about gold	15:14
	and soy beans, not something about the value of the dollar.	15:16
	Judged it terms of other currencies,	15:20
	the dollar has held up very well.	15:22
	Moreover, I share the comment	15:25
	which Treasury Secretary George Shultz	15:27
	made the other day that at present quotations	15:30
	the dollar is, if anything, undervalued	15:36
	rather than overvalued.	15:38
	We certainly are having our inflationary troubles	15:40
	but other countries are having them	15:42
	to a far greater extent.	15:43
	I have been impressed, in particular,	15:47
	by the change in circumstances in Japan	15:49
	where for the past six or eight years,	15:52
	you have had consumer prices rising	15:55
	something like 6% a year,	15:58
	but wholesale prices essentially stable	16:00
	and export prices either stable or falling.	16:02
	Within the last year, wholesale prices	16:05
	in Japan, for the first time I believe	16:08
	since about 1958,	16:10
	have risen drastically, over 10% in one year.	16:15
	Consumer prices have started to rise	16:19
	much more rapidly then they had before	16:21
	and most important of all, export prices,	16:23
	in yen, have been rising for the first time and sharply.	16:26
	I stress the, in yen because obviously	16:32
	the change in exchange rates means	16:35
	that even if the price of Japanese goods	16:39
	have stayed the same in yen, they would	16:42
	have risen sharply in terms of dollars,	16:44
	but the fact that they are rising	16:47
	also in yen, means that there's	16:49
	an even sharper rise in terms of dollars.	16:51
	So all things considered, I would be	16:54
	very much surprised if within the next year	16:56
	you did not see both a sharp decline	16:59
	in the price of gold and a sharp rise	17:02
	or, I don't wanna go fall into the same exaggerated tones,	17:05
	a moderate rise	17:10
	in the price of dollar in terms	17:11
	of other currencies.	17:13
-	A strong competitor for headlines	17:14
	still is the Watergate case.	17:17
	What do you think the relationship is	17:20
	between Watergate and the economy?	17:22
-	Well, Watergate, in any immediate sense	17:27
	has no effect whatsoever	17:30
	that I can see on the economy.	17:32
	It's a sensation, it may be reducing economic productivity	17:34
	because of the number of people who are watching	17:40
	the hearings on TV, but I can't believe	17:43
	that that's of any significance.	17:46
	It so far has not significantly	17:48
	affected economic policy.	17:50
	It's hard to see any change in the rate	17:52
	of monetary growth as a result	17:54
	of Watergate, as yet there has been	17:56
	little change in the budget so, up to date,	17:58
	Watergate has had no effect	18:04
	on the ongoing economic activity and yet,	18:06
	it seems clear that it has had	18:11
	a significant effect on the markets	18:13
	which reflect expectations of our future behavior.	18:15
	You have the international currency markets	18:20
	in which Watergate is increasingly	18:23
	the codeword being used to rationalize the disturbances.	18:26
	You have the US stock market, and again,	18:32
	Watergate is a codeword being used	18:36
	to rationalize the disturbances,	18:38
	and the weakness of the market.	18:41
	The question is, can that be justified?	18:43
	I stressed last time, part of the story	18:47
	and I wanna expand a little bit	18:50
	on what I said then.	18:52
	I argued then that one way in which you could interpret,	18:54
	I argue two different things	18:59
	that I really wanna bring together.	19:00
	I argued first that so far as the economy	19:01
	was concerned, the very rapid rate of growth	19:03
	in the first quarter of this year	19:07
	could not be explained by prior monetary	19:08
	or fiscal pressures.	19:10
	It had to be explained as an autonomous spending boom	19:12
	which I attributed in part	19:15
	to the rising inflationary expectations	19:16
	on the part of the consumer and in part	19:19
	to the great increase in certainty,	19:21
	the reduction of uncertainty on the part	19:25
	of entrepreneurs that arose last October	19:27
	when it became clear that Senator McGovern	19:29
	was not going to be elected.	19:31
	Now, if that interpretation is right,	19:34
	one can interpret Watergate as reversing the second	19:40
	of these effects,	19:44
	not the first but the second of it,	19:45
	because surely, if Watergate has	19:47
	any significance for the future,	19:50
	its main significance is that it increases	19:51
	enormously the uncertainty that everybody had	19:54
	about the kind of economic system,	19:59
	that we are going to be living under	20:01
	for the next 10 years.	20:02
	I don't have any special confidence	20:05
	or knowledge on the political side.	20:08
	I can't say what's going to come out.	20:09
	I don't know whether President Nixon	20:11
	will be forced to resign.	20:14
	I hope not but it may be that he will,	20:16
	the odds certainly are increasing that way every day.	20:19
	In any event, the very fact	20:23
	that one can raise such questions means	20:25
	that nobody can be sure who's gonna be running the economy	20:27
	over the next four years.	20:30
	Moreover, even if Mr. Nixon should survive,	20:32
	he will almost surely be a less powerful president	20:36
	over the next four years	20:39
	than he would have been in the absence	20:40
	of the Watergate affair.	20:41
	That means that rather than talking	20:44
	about uncertainty, there's a certainty.	20:46
	The certainty is that our economic policy	20:50
	over the next four years will tend	20:52
	to be farther to the left in the sense	20:54
	of involving more intervention	20:57
	in the economy, more government spending	20:59
	than it otherwise would have been	21:03
	because the decline in Mr. Nixon's power	21:06
	clearly means a rise in the power	21:10
	and strength of the Democratic majority	21:12
	in the House and the Senate.	21:14
	Then this Democratic majority has	21:16
	a predominantly interventionist leftist caste.	21:17
	As a result, there is a very good,	21:24
	well-founded basis on the part	21:27
	of businessmen in having concern	21:30
	about the shape of the business system	21:36
	over the coming years, the rules	21:39
	under which they will operate.	21:40
	The extent to which property rights	21:42
	will stay as they have been before.	21:45
	We have an immense catalog of possibilities	21:47
	along this line.	21:50
	Most recent events, which really fit into this pattern	21:52
	are some of the land-use laws,	21:55
	if you take the Adirondack legislation in New York.	21:57
	Again, for the moment I'm not questioning	22:01
	whether it's good or bad, but only	22:03
	what its effect is.	22:05
	Its effect is certainly to weaken	22:06
	private property rights, what a man	22:07
	can do with his land has become	22:09
	increasingly circumscribed and what is true	22:11
	of the use of land	22:14
	is even more true of what corporate enterprises can do,	22:16
	the pollution controls	22:19
	which they are required to impose,	22:20
	the increasing intervention	22:23
	into what they can say and do, insider trading,	22:24
	the change in the whole legal pattern,	22:27
	from a pattern of caveat emptor,	22:30
	to a pattern of producer responsibility	22:31
	for anything and everything that happens	22:34
	to its product after it gets out of its hands,	22:35
	the, let alone, the more specific wage-price controls	22:39
	and the like.	22:44
	The whole pattern adds up to a possible change	22:45
	in the fundamental character	22:51
	of our economic system with a great reduction	22:53
	in the property rights, in the opportunities	22:57
	to earn income through corporate enterprise.	23:01
	I don't mean to be saying that this will be realized.	23:06
	I don't mean to be saying that if realized,	23:09
	it will be a true revolution.	23:12
	I continue to have a great deal	23:17
	of confidence in the ingenuity of people,	23:19
	in finding ways to get around such	23:22
	governmentally imposed legislation.	23:24
	I continue to have a great deal	23:26
	of confidence in the incompetence	23:27
	of government and government administrators	23:29
	to enforce the regulations,	23:31
	but what I wanna stress now is that it is not unreasonable	23:34
	or irrational to be concerned about changes of this kind	23:38
	or to believe that at least for a time,	23:42
	they are going to impose very considerable costs	23:45
	on corporate enterprise.	23:49
	They are going to make the returns	23:52
	from corporate enterprise less	23:53
	than one might have expected	23:54
	and moreover, you cannot say that prudent investors	23:56
	are wrong to take such a possibility seriously	24:01
	and as a result to be very hesitant	24:05
	about investing their capital in the form	24:07
	of corporate enterprise and preferring	24:11
	instead to invest their capital in such,	24:13
	apparently non-interfering things	24:15
	as gold, land, pictures and so on.	24:18
	So it seems to me if one is to find a role	24:24
	for Watergate in the economy	24:27
	and the market this is the direction	24:29
	in which one must look.	24:30
-	I'm afraid we've come to our,	24:33
	to the end of our time again.	24:35
	Thank you very much.	24:37
	Remember, subscribers, if you have	24:38
	any questions or comments, please send them	24:40
	to Instructional Dynamics Incorporated,	24:42
	166 East Superior Street, Chicago, Illinois, 60611.	24:45
	We shall be visiting with you again in two weeks.	24:51

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Title:

Tape 122 - Adam Smith, Controls, Dollar and Gold, Watergate and the Economy

Date:

June 11, 1973

Contributor:

Friedman, Milton, 1912-2006

Subject:

Format:

audiocassettes

Language:

English

Digital Collection:

Paul A. Samuelson papers, 1933-2010 and undated

Source Collection:

Paul A. Samuelson papers, 1933-2010

Series:

Economics Cassette Series: Milton Friedman

Rights:

Limited Re-Use

CC BY-NC 4.0

Rights Note:

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

Identifier:

RL10082-CS-0284
ref2708_162
samuelsonpaul
duke:325306
pstau001283
ark:/87924/r45x25v99
1888f517-8648-41f5-8daa-fbf9f1d24bc6

Permalink:

https://idn.duke.edu/ark:/87924/r45x25v99

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Tape 122 - Adam Smith, Controls, Dollar and Gold, Watergate and the Economy

Transcript

Item Info

Economists' Papers Archive

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