Tape 64 - Federal reserve: controlling the money supply

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Announcer	Welcome again as	0:02
	MIT Professor Paul Samuelson discusses	0:02
	the current economic scene.	0:05
	This biweekly series is produced	0:07
	by Instructional Dynamics Incorporated	0:08
	and was recorded on November 23rd, 1970.	0:11
Man	One has very strongly the impression	0:15
	that at the present moment we and the economy	0:17
	are at the crossroads.	0:21
	In particular one has the impression	0:23
	from outside of Washington that inside the administration	0:25
	there is going on a very considerable reappraisal process,	0:29
	and that the administration is likely	0:36
	to come out of that process	0:39
	with a new expansionism.	0:42
	Now, I as an outsider can't be sure,	0:49
	but let me try to comment on the issues as they now appear.	0:54
	In the first place, and here I have to rely on gossip,	1:01
	since the election a number of the president's	1:09
	informal advisors have been saying that	1:11
	before the middle of the year they warned the president	1:16
	that the economy would be in a very poor position	1:20
	at the time of the election and that he seemed	1:23
	surprised to hear that advice,	1:26
	and their impression was that instead	1:29
	he had been told by at least some of his advisors that	1:32
	by the time of the election, the inflation would be	1:35
	pretty much broken or as people say its back would be broken	1:39
	and that the American people would recognize this	1:42
	and he would be rewarded or his party would be rewarded	1:45
	in the Congressional elections for this fact.	1:47
	I don't know whether that has any element of truth in it,	1:51
	but I think we have to accept the historical fact	1:57
	that at the time of the elections	2:02
	the economy looked about as bleak as,	2:04
	in my judgment, it's likely to look for a long time to come.	2:08
	The October drop in the production index	2:12
	was a very considerable one I think two and a half percent,	2:15
	and only half of that could be	2:19
	attributed to the General Motors strike itself.	2:20
	Furthermore, one cannot really say that	2:25
	the back of the inflation has been broken.	2:29
	I've been asserting that probably the worst was over	2:32
	sometime earlier in 1970 if we measure the worst	2:37
	by the period when the smooth rate	2:40
	of increase in prices was at its maximum.	2:45
	It's possible however that that inference of mine	2:51
	is erroneous but whether it's right or wrong,	2:54
	there certainly were lots of signs of a quickening	2:58
	of the rate of price and wage increase	3:01
	in the autumn period itself.	3:04
	The General Motors strike ended with a very	3:09
	considerable increase in wages.	3:15
	I don't think that one should be surprised that	3:17
	when a strike lasts as long as that,	3:20
	that one would find since the workers	3:23
	were not particularly capitulating,	3:27
	one would find that the company	3:29
	would have to settle on the high side.	3:32
	That has caused a great deal of concern.	3:35
	In fact the collective bargaining settlements	3:38
	are on the higher side just when the labor market itself	3:41
	is showing the most slack that it's had in a very long time,	3:46
	and just when there are some threats perceptible.	3:50
	Just barely perceptible reductions in the rate	3:54
	of increase in wages in the other, less organized markets.	3:57
	Still, anyone who has had for his principal preoccupation	4:03
	a concern about inflation certainly	4:10
	has not found reason to give advice to the president	4:14
	that he should move now towards a more expansionary tack.	4:19
	To illustrate let's take a typical body abroad,	4:23
	and I don't want to go to- to a body of central bankers	4:27
	who could be expected to have a bias	4:31
	at all times against inflation and something of a	4:33
	calloused indifference to unemployment.	4:37
	Let's just take a more representative and moderate	4:40
	type of body like the OECD, the technical economists there.	4:44
	They have a natural concern for inflation,	4:49
	but it's not an obsession with them.	4:53
	During the early 1960s they were	4:57
	urging the United States to be more expansionary,	5:00
	to use more expansionary fiscal policy,	5:03
	to use more expansionary monetary policy.	5:05
	I think that their advice in retrospect	5:08
	is invalidated by what happened.	5:11
	Well, a group like that as it looks at the United States	5:14
	is naturally not as impressed as perhaps I, myself am,	5:18
	by the increase in unemployment in Harlem,	5:24
	in Roxbury, on the West Side in Chicago.	5:27
	They're three thousand miles away,	5:30
	they look with the perspective of history on the process,	5:31
	and their general advice privately and publicly	5:34
	would be for the United States to adhere	5:39
	somewhat longer to a policy of restraint.	5:42
	The game plan which they would advocate is perhaps	5:47
	not all that different from the one which the president	5:51
	of the Federal Reserve Bank of St. Louis, Mr. Darryl Francis	5:54
	advocated in a number of speeches,	6:01
	some of which have been reproduced	6:04
	in the monthly letter that I've made reference to	6:05
	of the Federal Reserve Bank of St. Louis.	6:08
	Mr. Francis on at least one occasion	6:12
	was the sole dissenter against the open market committee,	6:14
	which was moving in a more expansionary direction.	6:17
	Now, why?	6:21
	It's not because Mr. Francis is a cruel man,	6:22
	but as he looks at the studies of his staff	6:25
	he finds that in the opinion of those studies	6:31
	if you take them at face value,	6:35
	unless the economy continues	6:37
	to increase the slack well into '72,	6:40
	there will be purchased very little	6:44
	in the way of inflation relief.	6:47
	And so, since he has no need to run for political office	6:49
	and perhaps not as great need as some other spokesman	6:52
	to speak in terms of immediate acceptability,	6:57
	Mr. Francis advocates a policy, a deliberate policy	7:00
	of having the ready growth of the money supply	7:05
	be in the next year something like 3%,	7:08
	I don't want to attribute any one number,	7:13
	but he would be on the low side	7:17
	of the recommended numbers that have been taking place.	7:19
	He knows this means that unemployment will increase	7:24
	above 6% and according to some estimates to above 7%,	7:28
	but he would point out that we should never have gotten	7:33
	into the inflationary situation in the first place	7:36
	and that you can't make omelets without cracking eggshells	7:39
	and this is the necessary price and besides,	7:43
	do we want to lose all the progress we've made?	7:46
	It would then be as if all the sacrifices	7:50
	that have been made already	7:54
	in terms of unemployment were for naught.	7:55
	Now, I'm not repeating this view at great length	8:00
	in order to give my approval to it,	8:03
	but I'm trying to show what the pressures would be	8:07
	upon the president of the United States	8:10
	as he calls in different advisors, in choosing among them.	8:13
	I've discussed one extreme, let me turn to another extreme.	8:18
	According to one of the syndicated columnists,	8:23
	Dr. Pierre Rinfret has been heard from again.	8:27
	Dr. Pierre Rinfret is one of the	8:30
	most successful consulting economists.	8:33
	His Boston Rinfret Associates, or Rinfret Boston Associates	8:35
	have a great reputation among businessmen.	8:43
	Dr. Rinfret was quoted as saying that	8:47
	he probably is the best economist in the world	8:50
	because he's the highest paid economist in the world.	8:52
	My experience with the press suggests	8:56
	that that probably is a misquote	8:58
	but he certainly has been doing extremely well.	9:01
	He was also a Nixon advisor in 1968.	9:05
	He's an extremely frank fellow,	9:13
	for example somebody said what's a nice guy like you,	9:15
	I'm now speaking facetiously,	9:18
	what's a nice guy like you doing	9:22
	advising a candidate like Mr. Nixon?	9:24
	And he replied, and this is in the public record,	9:27
	that he's the only fellow who asked me.	9:30
	Well, Mr. Rinfret is supposed to have written the president	9:33
	and told him that if he doesn't shake up	9:39
	his team of economic advisors and change his ways,	9:43
	that he's going to have unemployment	9:47
	of eight, nine, and ten percent,	9:49
	and that this is going to kill him in the 1972 election.	9:52
	That, then, are the two sides.	10:02
	Now, as listeners to this tape will know,	10:06
	I personally have been advising that the administration	10:10
	and the Federal Reserve take a more activist position	10:14
	with respect to the side of expansion.	10:19
	I'm cognizant that the inflation problem has not been licked	10:22
	but my studies do not suggest to me that it's really	10:26
	a true econometric law that you must break the back	10:30
	of something or else you have accomplished nothing.	10:35
	I think that if the Federal Reserve	10:39
	becomes somewhat more expansionary,	10:41
	and let me define what that means.	10:43
	The Federal Reserve was increasing the money supply	10:46
	from about February until a month or two ago	10:49
	at a rate of something like 5%.	10:53
	That's a non-controversial rate,	10:56
	I think all of the votes of the open market committee	10:59
	going back 90 days to the last	11:03
	published record have not been split votes.	11:05
	And in the last couple of months	11:11
	they've been even less expansionary than that.	11:14
	When my opinion is asked by a reporter,	11:17
	as to whether the Federal Reserve	11:20
	has been doing its job well I compliment	11:21
	the Federal Reserve on its turnaround this year,	11:24
	its rather strong, definite, recognizable turnaround.	11:27
	I compliment it upon its handling	11:30
	of the Penn Central crisis in the quality of credit,	11:33
	which required that there be a re-intermediation	11:37
	since the investing public lost confidence	11:41
	in the commercial paper market.	11:44
	It was very desirable that the investing public	11:45
	should put its money into the banks	11:50
	so that the banks could rationally dole out that money	11:52
	among those who needed it, who previously had depended	11:56
	upon the commercial paper market.	12:00
	I give them credit for that.	12:02
	I have not thought that 5% is too bad a rate,	12:04
	but my actual advice would be that they	12:10
	move that rate increase of the money supply.	12:15
	And here I'm speaking now of the so-called M1,	12:19
	the money supply narrowly conceived,	12:22
	which is currency and demand deposits.	12:25
	They should move that up to something like 7% per year.	12:29
	Now, they failed to do that	12:33
	by design, because they were increasing	12:38
	the money supply at only about 5%.	12:41
	But they failed by error to come even as close	12:44
	as I would like because they haven't been increasing	12:49
	the money supply at 5% during the period of the auto strike.	12:52
	During the auto strike there was a natural letdown	12:59
	in the demand for money because of the drop in real output	13:01
	incident to the General Motors strike itself.	13:07
	If the Federal Reserve had insisted upon	13:11
	increasing the money supply still at the rate of 5%,	13:14
	that would undoubtedly, given that shift in demand,	13:17
	have resulted in a rather rapid decline	13:20
	in short-term interest rates.	13:23
	Now short-term interest rates in fact did decline,	13:25
	but my point is that they would have declined	13:28
	even more rapidly if they had insisted upon	13:31
	increasing the money supply at that rate.	13:34
	Now, in my judgment since I want the rate	13:37
	to be higher than 5% it would not have been a catastrophe	13:40
	if they had let those money rates	13:44
	and treasury bills, federal funds rates,	13:48
	go down more by insisting upon increasing the money supply.	13:50
	But not a great deal from my viewpoint hangs on it.	13:56
	If I were a monetarist a great deal would hang on it,	13:59
	but I'm not a monetarist.	14:01
	What is important is that after this deal strike,	14:03
	for exactly the same reasons but now	14:06
	every part of the syllogism going into reverse,	14:09
	the Federal Reserve board should let the money supply	14:13
	grow by more than 5%,	14:18
	with the result that three months after	14:23
	the two-and-a-half-month auto strike,	14:27
	I would like to have the money supply	14:30
	be at least where it would have been	14:33
	if they had had a steady increase at 5%.	14:35
	I think that the private money market	14:37
	is very clever and it can absorb short-run fluctuations,	14:41
	it's not necessary to insist upon the letter of an increase	14:46
	at exactly the same rate in every week and every month,	14:50
	even if what you want over a period of time	14:54
	is a steady increase of the money supply.	14:57
	I want something more than that,	15:02
	and now I really show the difference	15:03
	between myself and a monetarist.	15:05
	I want the money supply in the short run	15:07
	to grow at about let's say 7%.	15:10
	I should add and make full disclosure,	15:14
	it would not shock me if for a period of four or five months	15:17
	the money supply increased at 7.5 to 8.5%.	15:21
	This doesn't mean that I am recommending	15:26
	that over the next two years the money supply	15:28
	necessarily grow at that rate, or over the next four years,	15:33
	but the whole gist of my advice on monetary policy	15:36
	is that you do not find the plateau	15:39
	on the rate of growth of the money supply and stick to it.	15:42
	Rather, use your best judgment	15:45
	as to what's going to happen in the next nine months.	15:47
	I say the next nine months because we know there are lags	15:50
	in the effect of Federal Reserve policy	15:54
	which are distributed over the next four quarters.	15:57
	When I say nine months for the mean of that lag,	16:01
	that's really a very generous and very long lag.	16:05
	Not long in terms of some of the econometric studies	16:09
	like the FRB-MIT model but long in terms of what	16:11
	say monetarists themselves generally believe in.	16:14
	And so you decide where the risks	16:19
	are in the next nine months and you decide	16:21
	whether the economy needs a push upward	16:24
	or a push downward in the money numbers	16:26
	and then if something like 5% is the average	16:31
	rate of increase of the money supply over a longer period,	16:35
	when the economy needs a push upward	16:37
	as judged by your best intelligence,	16:39
	you add something on above that 5% level.	16:42
	When it needs the opposite you take something off.	16:47
	I've been reviewing my own recommendations	16:51
	and actually doing some Monte Carlo experiments	16:53
	in which I run through the last year or two	16:56
	as they happened and as they would have happened	17:03
	if my own recommendations had been applied,	17:06
	and you may have to discount this as smugness	17:10
	but I find that you would have had a better pattern	17:14
	of anti-inflation struggle plus a better pattern	17:17
	of production growth and unemployment	17:24
	if there had been immediately when Mr. Nixon	17:28
	took office a less gradualistic policy,	17:31
	if the Federal Reserve had cut down even more	17:36
	than it did, say in the first half of 1969.	17:40
	In that case by the autumn of 1969	17:45
	it could have begun to move in the other direction.	17:49
	But that's water over the dam,	17:51
	I'm not trying to argue my particular wisdom	17:52
	over and against anybody else's and certainly	17:56
	the game of using hindsight is a very easy game to play,	17:59
	particularly if you're selective in your memory	18:05
	and if you're selective in the periods	18:08
	in which you mention your previous advices.	18:10
	But let me simply say that if the Federal Reserve	18:13
	were to follow my advice or if the president	18:19
	were to follow my advice and have	18:23
	a more expansionary fiscal policy,	18:26
	a deliberately more expansionary fiscal policy,	18:29
	he may get a more expansionary fiscal policy	18:32
	because as a result of the election	18:35
	he may find Congress more difficult to control	18:37
	even than it was for him to control earlier.	18:41
	But if he has a more deliberately	18:44
	expansionary fiscal policy and if the Federal Reserve	18:47
	somewhat steps up the rate of expansion	18:49
	of its monetary policy then I have to face the fact	18:52
	that this will cost us something	18:57
	in terms of the rate of price inflation.	18:59
	But how much will it cost us differentially?	19:02
	In my mind it will probably cost us something like	19:11
	that instead of having 3.5 to 3.25% rate of increase	19:17
	in the private deflator or in	19:22
	the consumer's price index say,	19:27
	you're likely to have something	19:30
	like .25 to .5 more than that.	19:31
	Indeed, from a longer run it's going to cost you	19:34
	more than that from the price level	19:37
	because as I have insisted again and again on these tapes,	19:39
	a mixed economy like ours does not know how	19:43
	to have a proper incomes policy.	19:46
	And so there is, there is, it cannot be repeated too often,	19:48
	there is a cruel dilemma, a cruel trade-off	19:52
	between really high employment and reasonably stable prices.	19:56
	Obviously I'm embracing one horn of that dilemma.	20:02
	I'm saying that in this critical political period,	20:06
	when our whole system is really on trial,	20:12
	certainly our two-party system is on trial,	20:16
	we cannot afford to...	20:20
	Fight down the line on inflation	20:25
	at whatever cost, in terms of unemployment, there will be.	20:28
	And therefore I'm saying don't indicate	20:33
	that forever afterward you're gonna be	20:36
	calloused about inflation but let the inflation	20:38
	not improve as much as it otherwise would.	20:42
	Will a president who follows such an advisor	20:45
	lose some votes in 1972?	20:49
	Certainly he will, you can't win all the votes.	20:51
	If you please the retired people	20:54
	in St. Petersburg, Florida,	20:57
	and they I may say are the real ones	20:59
	who have an interest in inflation control,	21:01
	all of our elaborate statistical studies	21:04
	show that there is one group and only one identifiable group	21:07
	who are really most hurt and hurt net by inflation.	21:10
	And they are the elderly, those who are caught	21:15
	in an unanticipated, once and for all,	21:18
	so to speak, new era of inflation.	21:22
	Well you can't win with them and at the same time	21:25
	win with Congressman Chisholm's constituency	21:29
	in the black part of Brooklyn.	21:33
	So you have to decide, I would say,	21:37
	of course I'm not a president,	21:42
	first where does the balance of good for the country lie,	21:43
	and secondly since you're not going to be there,	21:47
	to be in a position of deciding unless you	21:50
	meet the first test of every statesman and politician,	21:52
	which is to get elected.	21:55
	You have to decide where the advantage	21:56
	with respect to politics lies.	21:58
	Now, let me then, having given my advice,	22:02
	I'm not in a position to guess exactly	22:08
	where the president is going to strike the balance.	22:11
	I should be surprised, I may say,	22:13
	if he capitulates to either of you.	22:15
	One expects him, and this is not a criticism,	22:19
	one expects him as a political animal,	22:22
	one who will survive, to compromise.	22:25
	I ought to call your attention,	22:31
	just in the New York Times newspaper,	22:33
	the Sunday financial section of November 22nd,	22:38
	that's yesterday as I speak.	22:44
	There was an article on the game plan of the administration	22:46
	with a very interesting chart,	22:52
	because it was a chart of the gap.	22:53
	The gap between our full employment potential	22:57
	and where we actually are and it's very interesting	23:00
	because it would almost look as if somebody	23:03
	in the council of economic advisors,	23:05
	somebody perhaps near to Dr. Stein,	23:08
	had given a chart like this to the reporter in question.	23:13
	Now what that shows is to me a rather unlikely	23:20
	concatenation of future events.	23:24
	It shows real output stagnant between now,	23:27
	as I speak, and the middle of 1971.	23:30
	Then it shows it growing extremely rapidly	23:35
	between then and until just before the election,	23:38
	so that at the time of the next presidential election	23:41
	you actually are at full employment.	23:45
	Now, I believe that it's unrealistic	23:47
	on both branches, I don't see why anyone	23:52
	who is optimistic enough to think	23:56
	that the economy can be brought back	23:58
	to full employment by November of 1972,	24:00
	could be pessimistic enough to believe	24:03
	that the most likely pattern of real output	24:06
	for between now and the middle of the year is flat.	24:09
	Now, I don't say it's a ridiculous view	24:13
	that the real output will be flat,	24:16
	because to my mind there's at least	24:18
	a 20% probability of that.	24:21
	We congratulate ourselves that we've turned the corner,	24:24
	that the retardation is in sight of ending,	24:27
	that could be all wrong.	24:29
	But the people who believe that are	24:31
	much greater pessimists than anybody we are talking about.	24:34
	So it seems to me that with the rebound from the auto strike	24:37
	and the anticipated next year's steel strike	24:43
	that you will have output between	24:47
	now and the middle of the year	24:49
	growing at much more than a zero rate of increase,	24:50
	let's say something like, I'll speak of the first half	24:56
	of 1971, there ought to be an increase	25:01
	for that first half of 3%, maybe 2.5%, maybe 3.5%.	25:05
	Let me explain why.	25:12
	You know, that is my listeners know,	25:15
	that I am a little bit bear-ish on autos.	25:18
	I don't agree with those who say that	25:22
	a great automobile year is just around the corner.	25:24
	For reasons having to do with the rather new	25:28
	stock of autos which is rather full,	25:32
	I expect the auto demand to be pretty weak.	25:35
	But remember this, General Motors now has only	25:38
	a hundred thousand autos in inventory, that is the dealers.	25:41
	Half of those are 1970 automobiles.	25:45
	I'm told that this time of the year	25:48
	the more appropriate number is something like,	25:50
	something over half a million, 550 thousand.	25:53
	This means that even if this is going to be	25:56
	a terrible automobile year the automobile workers	25:58
	are going to have overtime, by one calculation I saw	26:01
	they're going to be earning more than ten thousand dollars	26:04
	a year annual rate for many many weeks to come	26:07
	just to fill the pipeline, these empty pipelines	26:10
	of General Motors' inventory.	26:14
	So that will all record itself,	26:16
	show itself in the increase in real output.	26:18
	Well, let's use my figures then for some increase	26:21
	in real output between now and the middle of next year,	26:27
	what about the other part of the story?	26:30
	Is it likely that real output will grow	26:32
	from the middle of next year until the election period	26:35
	at the rather prodigious rate, it is indeed 8% per annum	26:39
	for one or two of the quarters there involved?	26:43
	Again, I repeat what I said the tape before last,	26:48
	I rather doubt this because then I think	26:52
	the inflationary pressure would be very great.	26:55
	There is a false argument in my view,	26:57
	which says that anytime unemployment	26:59
	is over 4.5% they, unemployment will be sufficient	27:00
	to keep inflation from re-accelerating.	27:06
	I don't agree, I think that if the economy	27:09
	has very heavy unemployment but you're digging	27:11
	into that unemployment at a very rapid rate,	27:13
	that itself puts a great deal	27:17
	of pressure upon the price level.	27:19
	Therefore I expect the Federal Reserve	27:22
	would at that time be reversing itself	27:25
	from following the kind of advice	27:27
	which I have been giving it.	27:29
	Indeed I would myself counsel them	27:30
	to reverse at a time like that.	27:33
	And so, I conclude by saying that	27:37
	this is a time of a crossroad.	27:42
	It's going to clarify itself a little bit for us,	27:47
	because we're going to begin to get	27:49
	some official surveys, we expect the plans	27:51
	and equipment and some other year-end information	27:53
	which will be grist for the next year forecast.	27:55
	We're just about in that season when	27:59
	all the next year economic forecasts will begin to come out.	28:01
Announcer	If you have any questions or comments	28:06
	for Professor Samuelson, send them to	28:07
	Instructional Dynamics Incorporated,	28:09
	166 East Superior Street, Chicago, Illinois, 60611.	28:12

Item Info

Title:

Tape 64 - Federal reserve: controlling the money supply

Date:

circa 1970 to circa 1971

Contributor:

Samuelson, Paul A. (Paul Anthony), 1915-2009

Subject:

Format:

audiocassettes

Language:

English

Digital Collection:

Paul A. Samuelson papers, 1933-2010 and undated

Source Collection:

Paul A. Samuelson papers, 1933-2010

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Economics Cassette Series: Paul Samuelson

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Identifier:

RL10082-CS-0064
ref2267_yh4
samuelsonpaul
duke:325087
pstau001064
ark:/87924/r4804z19f
8a7c1bd5-7ade-4832-82ab-552fef085094

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Tape 64 - Federal reserve: controlling the money supply

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Economists' Papers Archive

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