Tape 8 - untitled
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Interviewer | Hello. | 0:02 |
It's Functional Dynamics Incorporated. | 0:02 | |
Welcome to, once again, for this weekly series | 0:04 | |
of commentaries on current economic developments. | 0:06 | |
Reporting to you as usual will be one of the nation's | 0:09 | |
leading economists, Professor Milton Friedman | 0:11 | |
of the University of Chicago. | 0:14 | |
Dr. Friedman, as you of course know, | 0:16 | |
many of your subscribers have written in | 0:18 | |
asking you questions. | 0:20 | |
Now that the year is coming to a close, | 0:21 | |
would you care to comment on them? | 0:23 | |
Dr. Friedman | I'd be glad to. | 0:24 |
Interviewer | Once subscriber asks, | 0:26 |
"What do you think of the proposal to recycle currencies | 0:28 | |
"among central banks to foil speculators?". | 0:30 | |
Dr. Friedman | This is a complicated sounding proposal. | 0:33 |
And, it might be worth taking a moment | 0:36 | |
to explain what it is. | 0:39 | |
The idea of it is, is when there's a question about | 0:41 | |
whether an exchange rate would be altered, | 0:45 | |
for example, recently when there was a question | 0:48 | |
about whether the Mark would be appreciated | 0:50 | |
or the Franc devalued, there is a strong tendency | 0:51 | |
for spectators to sell the currency | 0:55 | |
that's going to be devalued and buy the currency | 0:58 | |
that's likely to be appreciated. | 1:00 | |
That is to say, to sell Francs | 1:02 | |
and buy with the Franks, Marks. | 1:04 | |
Now, whom do they sell to? | 1:07 | |
In fact, they sell the Francs to the German central bank, | 1:08 | |
the Deutche bank, which buys the Francs | 1:11 | |
and sells people Marks. | 1:14 | |
The idea of this proposal is under such circumstances, | 1:16 | |
the German's central bank will take the Francs, | 1:20 | |
which it buys, and it would lend them back in Francs, | 1:22 | |
that is it would recycle them as the saying goes, | 1:26 | |
and deposit them in French banks or by French securities. | 1:29 | |
And thus, ease the pressure on the Francs. | 1:33 | |
And, the French would not have an accumulated indebtedness | 1:36 | |
of Francs outside in unfriendly hands. | 1:40 | |
This is the way it would work and there is absolutely | 1:45 | |
no difference whatsoever between that proposal | 1:48 | |
and just the general proposal that different currencies | 1:51 | |
support one another, different countries, I'm sorry, | 1:54 | |
support one another's currencies. | 1:57 | |
That whenever Francs are being sold for Marks, | 1:59 | |
the central bank of Germany should buy the Francs, | 2:04 | |
should accumulate the Francs, provide them Marks. | 2:07 | |
And, in this way, enables speculators who wish to get | 2:10 | |
rid of Francs, to get rid as much as they want. | 2:14 | |
The only special feature about this, | 2:17 | |
is the argument that it would be undesirable | 2:19 | |
for the German bank to do this under all circumstances, | 2:22 | |
because that's an open invitation to France to take | 2:26 | |
that particular example, simply to inflate. | 2:29 | |
By inflating, she makes the Franc worth less. | 2:32 | |
That is, worth a smaller amount, not worth nothing. | 2:36 | |
I didn't mean worth less as one word, but as two words. | 2:39 | |
Worth a smaller amount, people sell the Francs. | 2:42 | |
But, so far as France is concerned, what difference does | 2:48 | |
that make so long as Germany is willing to accumulate | 2:51 | |
an indefinite plan? | 2:54 | |
Clearly, Germany would not be willing | 2:55 | |
to accumulate Francs indefinitely. | 2:57 | |
And, so the idea of this proposal is that you would | 2:59 | |
make a distinction between movements of hot money, | 3:03 | |
as it's called, and ordinary movements. | 3:06 | |
Movements of hot money, which would be speculative | 3:09 | |
movements of the kind that we saw a few weeks back | 3:11 | |
when there was the big crisis between Francs and Marks, | 3:14 | |
would be handled by recycling currencies. | 3:18 | |
The movements of ordinary money would not be. | 3:21 | |
That sounds fine on paper, but the difficulty | 3:24 | |
is there's absolutely no way, whatsoever, of distinguishing | 3:27 | |
the hot money movements from the ordinary movements. | 3:32 | |
The Francs or Marks don't carry labels on them. | 3:35 | |
They don't have tags around their necks saying | 3:39 | |
this is a hot money movement, this is not. | 3:41 | |
Indeed, if you look at speculative movements | 3:44 | |
such as those that occurred between the Franc and the Mark, | 3:47 | |
a major part of the capital movement takes the form | 3:50 | |
of changes in the way in which | 3:54 | |
ordinary transactions are handled. | 3:56 | |
If your a Frenchman, and you are... | 4:00 | |
You owe Francs, you will pay offense. | 4:04 | |
You will get rid of the Francs fast | 4:07 | |
under such circumstances. | 4:09 | |
On the other hand, if you have Marks coming to you, | 4:11 | |
if you are a person who has... | 4:17 | |
a liability of a kind, | 4:22 | |
which will lead later on to Marks being paid to you, | 4:25 | |
you don't mind whether those come to you late. | 4:28 | |
You would just assume to lay the payments in Marks, | 4:30 | |
especially, if you're a Frenchman, who if you got the Marks, | 4:33 | |
might be under some pressure to turn them in | 4:36 | |
and buy Francs with them. | 4:37 | |
And, so you have the phenomenon of leads and legs | 4:39 | |
and payments, which is has been much | 4:42 | |
commented on in recent years. | 4:43 | |
Which accounts for a large part of the swing in the capital | 4:45 | |
movements in times of speculation. | 4:49 | |
And, simply by delaying payments or by speeding up payments | 4:53 | |
at a faster rate than you ordinarily would, | 4:58 | |
you can get a very large movement, indeed. | 5:01 | |
In consequence, it's impossible, in practice, to tell | 5:03 | |
what is hot money from what is cold money. | 5:06 | |
And, therefore, I think this proposal is a non-starter. | 5:09 | |
It will be talked about, but I don't believe anything | 5:14 | |
serious will ever come of it. | 5:16 | |
Interviewer | A subscriber asks, | 5:18 |
"Please, discuss the concept of 'crawling peg' | 5:20 | |
"in exchange rates. | 5:22 | |
"Would not the certain knowledge of change in rates, | 5:24 | |
"no matter how great it caused, | 5:26 | |
great speculative pressure?". | 5:28 | |
Dr. Friedman | That's a very good | 5:30 |
and a very sophisticated question. | 5:31 | |
Let me start with a concept of a crawling peg. | 5:34 | |
Right now, what we have are exchange rates | 5:38 | |
that are specified in single numbers. | 5:43 | |
The exchange rate of the dollar vis-a-vis | 5:47 | |
the pound sterling is $2.40. | 5:50 | |
That is, one pound sterling equals $2.40 after the | 5:54 | |
British devaluation of the year ago. | 5:57 | |
There's range of roughly 1% on each side of that | 6:01 | |
with in which market rates can go. | 6:04 | |
But, the British government is suppose to engage in | 6:07 | |
activities on the market to keep the exchange rate | 6:11 | |
between $2.40 plus 1% and then $2.40 minus 1%. | 6:14 | |
And, that $2.40 stays the same overtime. | 6:22 | |
It's a fixed constant rate. | 6:24 | |
The idea of a crawling peg is that if you have | 6:27 | |
a rate of $2.40, and if at that rate there is pressure | 6:30 | |
on the pound, that is to say, more people are trying | 6:35 | |
to sell a larger number of pounds. | 6:39 | |
And, other people wanna buy, so that the bank of England | 6:41 | |
has to intervene in the market in order to buy the pounds. | 6:44 | |
That the exchange rate, the peg, the $2.40, | 6:49 | |
should gradually, and at a steady rate, crawl, | 6:53 | |
move away from where it is. | 6:57 | |
For example, instead of being $2.40 throughout the year, | 6:59 | |
it should be $2.40, and then one quarter later, $2.39, | 7:03 | |
and a quarter later, I'm sorry, I got it backwards, | 7:07 | |
oh no, that's right. | 7:09 | |
If it is pressure against if it's devaluing, | 7:10 | |
it would be $2.40, then $2.39, then $2.38, then $2.37, | 7:14 | |
then $2.36, and so on down the line. | 7:19 | |
If the pressure were greater, it might go from $2.40 | 7:22 | |
to $2.38, $2.36. | 7:25 | |
But, the idea of the crawling peg, is that the change | 7:27 | |
would be small, but gradual and continuous. | 7:32 | |
As we know, what we've experienced in the post war periods, | 7:36 | |
have been long periods of stability, | 7:40 | |
and then very large changes. | 7:41 | |
The pound sterling, a little over a year ago, went overnight | 7:43 | |
from $2.80 to $2.40 cents. | 7:47 | |
That was a big change. | 7:50 | |
It caused many people to make enormous fortunes, | 7:52 | |
other people to lose fortunes. | 7:54 | |
It caused enormous disruption in the market. | 7:57 | |
The idea of a crawling peg is to have a gradual movement. | 8:00 | |
Personally, I think this is a far better system | 8:05 | |
than the present fixed peg. | 8:07 | |
Although, as I've stated many times, I would prefer | 8:09 | |
an arrangement under which there was no peg at all. | 8:12 | |
Under which the price of the pound sterling, | 8:15 | |
in terms of the dollar, would be fixed in a free market | 8:17 | |
in under which you would have | 8:20 | |
floating flexible exchange rates. | 8:21 | |
Now, this is the idea of a crawling peg. | 8:23 | |
There are various devices that have been suggested | 8:27 | |
where by it would be achieved. | 8:30 | |
The one device, for example, is that the peg for any period | 8:32 | |
would be an average of the actual market rates | 8:38 | |
achieved during a previous period. | 8:42 | |
Now, for example, the... | 8:44 | |
The official exchange rate for | 8:48 | |
the pound sterling is $2.40, but as I mentioned earlier, | 8:52 | |
the market rates can go plus and minus 1%. | 8:55 | |
1% of $2.40 is about... | 8:58 | |
2.4 cents. | 9:03 | |
That means, that the exchange rate can go roughly between | 9:08 | |
$2.38 and $2.42. | 9:12 | |
Suppose there's pressure on the pound sterling. | 9:15 | |
Well, the exchange rate will tend to be, | 9:19 | |
hover around $2.38. | 9:23 | |
If it hovers there for a while, and you take | 9:26 | |
an average of it, the next quarter, or whatever period | 9:28 | |
for averaging you take, the parity instead of being | 9:33 | |
$2.40 would move to $2.38. | 9:36 | |
Which, would mean, that the exchange rate could go between | 9:38 | |
$2.36, roughly, and $2.40. | 9:42 | |
If there was still pressure on the pound sterling, | 9:45 | |
it would hover about $2.36. | 9:48 | |
And, then when you took the average of the earlier periods, | 9:50 | |
the next quarter, the exchange rate would be $2.36. | 9:53 | |
And, you can see that in this way, you could get a very | 9:57 | |
gradual adjustment of the exchange rate. | 10:00 | |
The rate in which the parity adjusts depending on how | 10:03 | |
long a period you use for constructing your average, | 10:08 | |
and also, on how wide a range you permit around the par. | 10:11 | |
Now, this is the idea of a crawling peg. | 10:19 | |
That's only one way in which it could crawl. | 10:22 | |
Another set of proposals has been made, | 10:25 | |
is that what happens to the parity should depend on | 10:27 | |
what happens to the exchange reserves | 10:30 | |
of the country in question. | 10:32 | |
That if a country is losing exchange reserves, | 10:34 | |
this should automatically be fed into the parity, | 10:37 | |
and the par should decline | 10:40 | |
as it's reserves go down. | 10:44 | |
Or conversely, if a country is gaining reserves, | 10:46 | |
as Germany is under the fact the Mark is very strong, | 10:49 | |
well, then the Mark would appreciate at a gradual rate | 10:53 | |
quarter by quarter. | 10:56 | |
The rate being faster, the more rapidly | 10:58 | |
Germany is accumulating reserves. | 11:00 | |
As I say, there are a dozen and one possible formulas, | 11:02 | |
but all of them have the same feature in common. | 11:06 | |
Then, in the first place, the changes permitted | 11:08 | |
in the parity from month to month or quarter to quarter | 11:11 | |
would be relatively small. | 11:13 | |
And, the second place, how much you change would depend | 11:15 | |
on the earlier behavior, either of the exchange rate | 11:19 | |
or of the exchange reserves of the country in question. | 11:22 | |
Now, the questioner goes on to ask, and this is really the | 11:25 | |
interesting part of the question. | 11:28 | |
Would not such a crawling peg induce speculative movements | 11:30 | |
no matter how slow is the rate of change in the peg? | 11:34 | |
The answer to that is no. | 11:38 | |
And, the reason the answer is no, | 11:40 | |
is because of a very special, technical feature. | 11:43 | |
Namely, the fact that a change in the exchange rates | 11:48 | |
can be offset by an interest rate differential. | 11:51 | |
The reason why it looks as if you might have speculation | 11:57 | |
is like this, the pound sterling is under | 11:59 | |
a crawling peg, for example. | 12:03 | |
And, you know perfectly well in advance, | 12:05 | |
that while the pound sterling is now $2.38, | 12:08 | |
a quarter later, it's going to be $2.36. | 12:11 | |
And, so you say to yourself, well gee, | 12:15 | |
I've got some pound sterlings. | 12:17 | |
Why don't I sell that $2.38, | 12:19 | |
and then why don't I buy it back at $2.36? | 12:22 | |
I'll make a profit on that. | 12:25 | |
I'll get more pound sterlings at the end | 12:28 | |
than I started with. | 12:30 | |
That's fine, but let's look at what you do with your money | 12:31 | |
in the meantime. | 12:34 | |
Suppose I sell my pound sterlings at $2.38, I get dollars. | 12:35 | |
Suppose I invest those dollars in the New York market. | 12:40 | |
Then, I get the interest rate which is prevailing | 12:43 | |
in the New York market. | 12:45 | |
Let's say that's 5%, 6%, whatever it might be. | 12:46 | |
If we take something like a treasury bill, maybe 5%. | 12:51 | |
Six months later, I convert those dollars back into | 12:56 | |
pound sterlings, and I get pound sterlings at $2.36. | 13:00 | |
It looks as if I'm better off. | 13:05 | |
But, suppose the interest rate in Britain, in the meantime, | 13:07 | |
was not 5%, but 6% or 7%. | 13:10 | |
In that case, what I've gained in exchange, | 13:14 | |
I have lost in interest rate. | 13:17 | |
And, in general, through what is known as | 13:22 | |
interest arbitrage, that is precisely the arrangement | 13:24 | |
I just described to take advantage | 13:28 | |
of differences in interest rates. | 13:30 | |
What would turn out to be the case under a crawling peg | 13:32 | |
would be the differences of the interest rates in the | 13:36 | |
two countries would precisely compensate for what | 13:39 | |
appears to be an opportunity for profit for unknown | 13:43 | |
rate of change in the exchange rate. | 13:47 | |
The only problem in this kind of interest arbitrage | 13:51 | |
is to keep the rate of the change of the peg, of the parity, | 13:55 | |
small enough so that the interest rate differentials | 14:01 | |
can compensate for it. | 14:04 | |
It's very hard to think under ordinary circumstances | 14:06 | |
on interest rate differential. | 14:09 | |
Between Britain and the United States, | 14:11 | |
let us say it's 10 percentage points. | 14:13 | |
Yet, that is what would be required to compensate | 14:16 | |
for a decline in the British exchange rate at | 14:20 | |
the rate of 10% a year. | 14:23 | |
However, there is really no such difficulty. | 14:26 | |
The only circumstances under which there would be any need | 14:29 | |
for so large a rate of decline in the British exchange rate, | 14:34 | |
would be if, for example, if Britain were engaging | 14:38 | |
in rapid inflation while the United States were not. | 14:41 | |
Suppose, prices in Britain were rising at the rate | 14:45 | |
of 10% a year, and in the United States, they were stable. | 14:47 | |
Then, in order to offset this through | 14:52 | |
the exchange rate mechanism, it would be necessary | 14:54 | |
for the exchange rate to decline at the rate of 10% a year. | 14:56 | |
But, the other side of that picture is, | 15:01 | |
that borrowers and lenders in Britain would demand | 15:04 | |
interest rates 10 percentage points higher to compensate | 15:08 | |
for the inflation and they would demand the United States. | 15:12 | |
And, consequently, in a free exchange market, | 15:15 | |
if you hadn't neither of no crawling peg, | 15:20 | |
but simply flexible exchange rates, | 15:22 | |
what would be happening would be | 15:24 | |
that the British exchange rate would be declining | 15:26 | |
at 10% a year. | 15:28 | |
British interest rates would be 10 percentage points higher. | 15:29 | |
The interest differential would be precisely offset | 15:33 | |
the possibilities of gain through exchange rate speculation. | 15:35 | |
Consequently, there would be no exchange rate speculation. | 15:39 | |
And, everything would be perceiving as if | 15:42 | |
there were a fixed exchange rate, | 15:45 | |
and the same rate of inflation, or let's say stable prices, | 15:47 | |
in both Britain and the United States. | 15:51 | |
Thus, the ultimate answer to the question | 15:54 | |
asked by the subscriber is that speculative possibilities | 15:56 | |
do not in any way prevent a system involving crawling peg. | 16:01 | |
Interview | As another question, | 16:06 |
"Would you comment on the possibility of inflation | 16:07 | |
"in the United States reaching levels similar | 16:09 | |
"to Brazil or China in the late 1940s, | 16:11 | |
or Germany in the 1920s?". | 16:14 | |
Dr. Friedman | The cases you cite are not really | 16:16 |
all the same. | 16:19 | |
The Brazilian case is really in | 16:21 | |
a different class completely, | 16:23 | |
than either the Chinese or the German cases. | 16:24 | |
A view from our perspective, it may not appear that way. | 16:27 | |
The rate of inflation in Brazil in recent years | 16:30 | |
has been as high as 50% a year and some years | 16:33 | |
as high as 75%-80% a year. | 16:36 | |
That seems terrific when you compare it with | 16:38 | |
the American rate of inflation | 16:40 | |
of perhaps 3% or 4% or 5% a year. | 16:42 | |
But, in the Chinese and German cases, | 16:48 | |
the rate of inflation was all together of a much | 16:50 | |
higher order of magnitude. | 16:53 | |
A student of mine, Phillip Cagan, did a doctor's thesis | 16:55 | |
some years back, which has become | 16:58 | |
a kind of a classic, on hyperinflations. | 17:00 | |
And, he defined a hyperinflation as starting when prices | 17:04 | |
began to rise at a rate of more than 50%, not a year, | 17:08 | |
but a month. | 17:12 | |
And, at that point, your just at the beginning | 17:15 | |
of a hyperinflation. | 17:17 | |
And, during the extreme part of the German hyperinflation | 17:19 | |
of the 1920s, there was a period when prices | 17:23 | |
were doubling everyday. | 17:26 | |
They were rising 100% per day, which seems incredible. | 17:29 | |
It got to the point at which employers were paying | 17:33 | |
there workers wages three times a day | 17:37 | |
after breakfast, lunch, and dinner, | 17:40 | |
so that they could rush out and spend the money | 17:42 | |
before it became worthless. | 17:44 | |
John Maynard Keynes in commenting on the | 17:49 | |
Russian hyperinflation after World War I, | 17:51 | |
after the Bolsheviks just came in | 17:56 | |
and you had a real hyperinflation, on the German lines, | 17:58 | |
not on the Brazilian line. | 18:01 | |
Somewhere where he was writing, tells a story about | 18:03 | |
observing people at the market selling goods. | 18:07 | |
Accumulating great bales or money, paper money, | 18:11 | |
that filling wheelbarrows, and then literally, | 18:15 | |
rushing the wheelbarrows off to the wholesale market | 18:18 | |
in order to replace their goods and services before | 18:22 | |
the wheelbarrows of money became worthless, | 18:24 | |
that he commented that that was a real | 18:26 | |
velocity of circulation in a physical sense, | 18:29 | |
and not only in a hypothetical sense. | 18:32 | |
So, that the kind of inflation, which you had in Germany, | 18:34 | |
which you had in China... | 18:38 | |
is of a wholly different order | 18:43 | |
of magnitude than the kind of inflation | 18:45 | |
that you had in Brazil, the kind of inflation | 18:47 | |
at the rate of 50% or 75% a year. | 18:48 | |
While it's a very unpleasant kind of thing, | 18:51 | |
it can continue for a very long time. | 18:53 | |
For example, in Chile, over the last 50 years or so, | 18:56 | |
you've had an average rate of inflation, | 19:00 | |
and if my memory serves me right, is somewhere about | 19:01 | |
20% to 25% a year. | 19:05 | |
Where as the kind of hyperinflation that you had in | 19:07 | |
Germany in the 1920s or in China in the 1940s, | 19:09 | |
it cannot continue very long. | 19:13 | |
It's impossible for that kind of thing to last | 19:15 | |
for more than a couple of years. | 19:18 | |
So, the cases that the subscriber asks about | 19:19 | |
are really quite different. | 19:22 | |
Now, let's consider them. | 19:23 | |
I think the chance in the USA of having a hyperinflation | 19:26 | |
on the German or the Chinese model is zero. | 19:30 | |
Historically, if you look at the record, | 19:34 | |
such inflations have only occurred in countries | 19:37 | |
which at the end of a long and devastating war, | 19:41 | |
have been on the defeated side, | 19:45 | |
and where as the central government has lost | 19:47 | |
a large part of it's potential power to govern. | 19:50 | |
In Germany, after World War I, that was the case. | 19:54 | |
The hyperinflation started before the Weimar government | 19:58 | |
was set up. | 20:01 | |
The government had lost it's power | 20:03 | |
to collect resources by taxes. | 20:04 | |
The only device it had for collecting any resources | 20:07 | |
was spreading money and printing money at such | 20:10 | |
an enormous rate, that it became valueless. | 20:13 | |
Similarly in China, the Chinese case | 20:17 | |
is a much more interesting case, I may say. | 20:21 | |
It's hard to believe it, but it's true, | 20:23 | |
that it dates back to American policy. | 20:25 | |
It seems like a fantastic thing to say, | 20:28 | |
and yet I am persuaded on the basis of much evidence, | 20:30 | |
that one of the half dozen most important reasons | 20:33 | |
why China is communist today, is because of the | 20:35 | |
American silver purchase program of the 1930s. | 20:39 | |
Under that program, we drained China of it's silver, | 20:42 | |
we destroyed it's monetary system, | 20:45 | |
we've put it on a paper standard, | 20:47 | |
and, ultimately, Chiang Kai-Shek was forced under the | 20:49 | |
agencies of war to print enormous bales of paper money, | 20:52 | |
which declined in value. | 20:57 | |
It was this hyperinflation, at the very end of his regime, | 20:59 | |
which helped pave the way for the Chinese communist | 21:02 | |
to take over. | 21:04 | |
Now, that as I say, that kind of hyperinflation | 21:06 | |
has only occurred under very extreme conditions | 21:08 | |
of nations which were essentially incapable of governing. | 21:11 | |
In which you have no affect of central government | 21:15 | |
capable of raising funds by taxes. | 21:18 | |
That's not the situation of the United States today. | 21:20 | |
It's not likely to be the situation | 21:23 | |
in the foreseeable future. | 21:24 | |
It's hard to, we can hope at any rate | 21:26 | |
that it's almost inconceivable. | 21:28 | |
On the other hand, if you come to an inflation | 21:31 | |
of the Brazilian type, that's the different kettle of fish. | 21:34 | |
As I say, that kind of inflation, 50%, 60%, 70%, 80%, | 21:38 | |
90% a year can last for a long time. | 21:41 | |
Again, I do not believe that it is very likely | 21:46 | |
in the United States. | 21:48 | |
It's not likely, because we need not have it. | 21:50 | |
We know how to prevent it. | 21:52 | |
It's not likely, because we do have an affective | 21:54 | |
tax administration which will enable the government | 21:57 | |
to raise substantial resources by means | 22:00 | |
other than printing money. | 22:02 | |
But, you cannot rule it out completely. | 22:05 | |
It's possible to see how over a very considerable | 22:07 | |
period of time, I don't think it could occur | 22:11 | |
in the United States in the next few years, | 22:13 | |
but over several decades, it could. | 22:15 | |
You can see how you get people accustomed to | 22:18 | |
moderate rates of inflation. | 22:21 | |
Right now, we have a rate of inflation | 22:23 | |
of something like 3%-5%, | 22:24 | |
and people are getting accustomed to it. | 22:27 | |
You can see how if people became accustomed to it, | 22:30 | |
and then there might be pressure | 22:35 | |
for going up a little higher. | 22:37 | |
If there was a recession in the course of an inflation | 22:38 | |
running at 4% or 5%, there would be great pressure | 22:41 | |
to do something about it. | 22:45 | |
And, that pressure would take the form of printing | 22:46 | |
still more money. | 22:48 | |
Now, one thing we know, is that by printing pieces of paper | 22:50 | |
at a fast enough rate, you can temporarily get a great deal | 22:53 | |
more of activity. | 22:59 | |
You can stimulate activity. | 23:00 | |
It's a false kind of activity. | 23:02 | |
It doesn't last. | 23:04 | |
Pretty soon, it starts going out in prices, | 23:06 | |
and pretty soon as people get adjusted to it, | 23:08 | |
it doesn't do any good. | 23:10 | |
And, then what you have to do, is to put in a bigger dose. | 23:12 | |
And, so I can see how over a period of decades, | 23:15 | |
it would be possible. | 23:18 | |
As a result of overreaction to the recessions that punctuate | 23:21 | |
those decades, how it would be possible to accustom | 23:25 | |
people first to 5% a year, then 10% a year, then 15% a year. | 23:29 | |
When inflation was preceding at 5% a year, | 23:34 | |
interest rates would be 5 percentage points | 23:37 | |
higher than otherwise. | 23:39 | |
There would be escalator contracts, wage contracts, | 23:40 | |
would all be adjusted to it and so on. | 23:43 | |
In order to get a stimulus, you would then have to inflate | 23:46 | |
it 8% or 10% or 11% a year and so on. | 23:49 | |
I can see that as a possibility. | 23:52 | |
But, as a probability, I think the probability is low. | 23:54 | |
Perhaps, it's only my innate optimism, | 23:59 | |
but I believe that we are learning as a nation | 24:01 | |
that this is not a very profitable road. | 24:04 | |
That we're now at a rate of 4% or 5% inflation, | 24:08 | |
and that we are likely, sometime in the next few years, | 24:11 | |
to take affective steps to curb it. | 24:15 | |
If we do so, there is certainly no reason why we need to | 24:17 | |
move toward levels of inflation of the kind | 24:22 | |
Brazil has experienced. | 24:25 | |
And, I think the odds are, that we shall not do so. | 24:26 | |
But, that's not the same as saying that you can completely | 24:30 | |
rule out the possibility. | 24:32 | |
Interviewer | Following up your comments in | 24:34 |
your earlier tapes, isn't the Nixon administration | 24:36 | |
likely to take steps, right now, | 24:38 | |
that will cut short the inflationary process | 24:40 | |
you were just describing? | 24:42 | |
Dr. Friedman | The Nixon administration will | 24:44 |
certainly try to do so. | 24:45 | |
It clearly has as a major item in it's program, | 24:48 | |
the attempt to get inflation under control. | 24:52 | |
But, unfortunately, there is one element | 24:56 | |
of the control mechanism that cannot | 24:59 | |
manipulate very affectively. | 25:04 | |
That is the Federal Reserve board. | 25:06 | |
The Federal Reserve is still an independent agency. | 25:08 | |
The Federal Reserve board controls the money supply. | 25:13 | |
As I have emphasized repeatedly, in my opinion, | 25:17 | |
control over the money supply is absolutely critical | 25:21 | |
and crucial for control over inflation. | 25:23 | |
The Federal Reserve board has been talking as if it were | 25:27 | |
trying to control inflation, but there has been | 25:30 | |
an enormous gap between what it says and what it does. | 25:33 | |
It had been increasing the quantity of money | 25:37 | |
at an extraordinarily rapid rate. | 25:39 | |
Currency, plus aggregate commercial buying deposits | 25:41 | |
demand in time, has been going up at the rate at something | 25:45 | |
like nearly 10% a year. | 25:48 | |
I think it's about between 9.5% and 10% a year | 25:50 | |
since something like the middle of 1967. | 25:56 | |
That's an extraordinarily rapid rate, | 26:02 | |
and that's why we've been having such a rapid rate | 26:05 | |
of GNP advance. | 26:07 | |
And, that's why prices have been rising so rapidly. | 26:09 | |
The Fed recently raised the discount rate. | 26:13 | |
But, this was not a move towards tightness. | 26:16 | |
This was simply a minor reaction | 26:19 | |
to the inflationary process, which it itself it caused. | 26:23 | |
By it's earlier rapid monetary expansion, | 26:27 | |
it had produced rapidly rising GNP, | 26:30 | |
rising inflationary pressure, or rising demand for loans, | 26:34 | |
rising interest rates, and the discount rate, | 26:38 | |
it had gotten out of line with market interest rates. | 26:40 | |
In order to bring it back into line a bit, | 26:44 | |
it raised the discount rate. | 26:46 | |
Maybe it's going to change it's spots. | 26:50 | |
Maybe now, having read the election returns, | 26:52 | |
and listening to the Nixon administration, | 26:54 | |
the Federal Reserve will, in fact, cut down | 26:56 | |
the rate of growth of the quantity of money. | 26:58 | |
But, unless it does so, the interesting thing is, | 27:00 | |
that the Nixon administration cannot get control | 27:05 | |
of the inflationary process, unless it can either | 27:10 | |
get control of the Federal Reserve, | 27:14 | |
or at least persuade the Federal Reserve board, | 27:17 | |
that it should pay more attention to the money supply, | 27:20 | |
and less attention to interest rates. | 27:22 | |
Now, this is not utterly impossible. | 27:25 | |
But, at the moment, it doesn't look very promising. | 27:28 | |
So far as getting control of the Federal Reserve board, | 27:32 | |
you have very interesting situation. | 27:34 | |
Some years back, Chairman Martin testified before congress | 27:36 | |
that it was desirable to have the term of office | 27:42 | |
of the head of the Federal Reserve board coincide | 27:46 | |
with the term of the office of the president. | 27:49 | |
In accordance with that testimony, you would expect | 27:52 | |
that Mr. Martin would offer his resignation | 27:55 | |
at the present time to take affect with the inauguration | 27:58 | |
of the president on January 20th. | 28:02 | |
But, he has not done so. | 28:04 | |
Instead, he has agreed, apparently under urging | 28:06 | |
for Mr. Nixon, that to remain as chairman for a time. | 28:10 | |
He cannot remain for very long. | 28:15 | |
His term of office expires and I think it's in | 28:17 | |
January or February of 1970, and cannot be reappointed. | 28:20 | |
But, until Mr. Martin terminates his office in the Fed, | 28:24 | |
and until Mr. Nixon can appoint his own man as head | 28:28 | |
of the board of governor in the Federal Reserve, | 28:31 | |
it is very doubtful that he can affectively get control | 28:34 | |
over the Federal Reserve board. | 28:36 | |
Perhaps, the Fed can be persuaded that it should | 28:38 | |
pay more attention to the quantity of money | 28:43 | |
that it has been doing. | 28:44 | |
I have repeatedly in the past two or three years thought | 28:46 | |
that it was seeing the light, and believed it was | 28:49 | |
on the verge of persuasion. | 28:52 | |
But, each time that I have been optimistic, | 28:54 | |
it has turned around and continued it's bad ol' ways | 28:56 | |
of paying little attention to the quantity of money, | 29:00 | |
of stressing interest rates, and of changing the | 29:02 | |
quantity of money in a way in which it was designed | 29:05 | |
to achieve objectives other than those, | 29:08 | |
which itself announced. | 29:11 | |
Seldom in recorded history has there been a wider gap | 29:13 | |
between the promises that have been made by the Fed | 29:17 | |
and the performance it has achieved. | 29:20 | |
Interviewer | Thank you, Dr. Friedman. | 29:23 |
If you have questions or comments or suggestions for | 29:24 | |
topics you would like discussed in this series, | 29:27 | |
please send them to | 29:29 | |
Instructional Dynamics Incorporated | 29:30 | |
166 East Superior Street, Chicago, 60611. | 29:32 |
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