Tape 36 - Appointment of Arthur Burns to Fed, German Mark and Exchange Rates / Paul A. Samuelson papers, 1933-2010 and undated / Duke Digital Repository

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Hello, this is Instructional Dynamics

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inviting you to another of our biweekly interviews

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with Dr. Milton Friedman, professor of economics

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at the University of Chicago.

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We are taping this interview on Wednesday, October 22nd.

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Professor Friedman, the big item of economic news this week

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is the appointment of Dr. Arthur Burns

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as chairman of the Federal Reserve Board.

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What is your reaction to his appointment?

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I think it's an excellent appointment,

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the very best that could be made.

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Arthur Burns is the right man,

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at the right time, for the right job.

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He is the right man because he has precisely the background

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of knowledge, experience and understanding,

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as well as the personal force that is required for the job.

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It should be emphasized that his appointment

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represents a complete break

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with the long tradition of chairmen of the board.

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To the best of my knowledge,

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Dr. Burns is the first professional trained economist

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to become chairman of the board.

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Almost all chairmen of the board, hither to,

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have been recruited either from the banking community,

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or from the financial community,

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or in a few cases, simply political figures

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who could be classified as neither but were lawyers.

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For example, the very first chairman of the board

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for the first year of its existence in 1914 to 15

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was a main lawyer by the name of Hamlin,

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who had been assistant secretary of the Treasury

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and had no particular expertise

1:37

in either banking or financial matters.

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But of course at that time,

1:43

what mattered was not so much the chairman of the board,

1:45

as the president of the New York Federal Reserve banks

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since the banks had far more power

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than the board did at that time

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and there the tradition was maintained.

1:54

Benjamin Strong who was the first governor,

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as he was then called,

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of the Federal Reserve Bank of New York,

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who was a banker who had come up, if I remember rightly,

2:03

through the Bankers Trust company.

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Similarly, if we take the chairmen of recent years,

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Marriner Eccles, who served as chairman for a long time,

2:13

was appointed by Franklin D. Roosevelt,

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was a banker from the mountain states.

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He was succeeded by McCabe, who was a business man

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that had a Scott Paper Company.

2:29

William McChesney Martin, who succeeded him

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and who is now leaving, came directly from the Treasury,

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where he was either assistant

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or under secretary of the Treasury,

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but prior to that, he had been in Wall Street

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as a security man, as a financial man.

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So, that to the best of my knowledge, this is a first time

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that you have a man who has been trained in economics

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as opposed to a man who had his experience in business.

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This seems, to me, extremely important,

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because one the major confusions in monetary policy

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throughout its experience, a point I've emphasized

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on these tapes again and again,

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has been the confusion between credit policy on the one hand

3:10

and monetary policy on the other.

3:13

Credit policy concentrating

3:15

on terms and conditions of credit,

3:17

monetary policy concentrating on the volume

3:19

of various monetary aggregates such as the quantity of money

3:22

as defined one or another way.

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It has been entirely natural for bankers

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and people to come out of the financial community

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to place major emphasis on the credit aspects

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and on their relations to the commercial banking system.

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It is entirely natural for a man like Dr. Burns,

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who comes out of a academic intellectual scholarly community

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to place major emphasis on monetary magnitudes

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and thus I think his appointment

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really signalizes a revolution,

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which may of course not finally be completed,

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but signalizes a revolution in the concepts

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which are likely to lead and guide

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the central banking system of the United States.

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Why do you say this is the right time for his appointment?

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This is partly connected with the point I just made.

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If Dr. Burns had been appointed three years ago,

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he would have entered into a reserve system,

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both the board and the banks,

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which was almost wholly unsympathetic

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to the kind of viewpoint he will bring to his job.

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As of that time, the emphasis on credit conditions,

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the denigration of monetary aggregates

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as an important component of policy, was nearly complete.

4:33

In the past three years, there has been a drastic change

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in attitude within the system,

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as well as in the public at large.

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That change has consisted of a far greater recognition

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of the importance of monetary magnitudes,

4:50

of monetary totals, and a diminution

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in the emphasis placed on credit magnitudes.

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I have often symbolized this by pointing out

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that in his testimony this spring, before,

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I believe it was a Joint Economic Committee

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but it might have been the House Banking

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and Currency Committee, Chairman Martin,

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for the first time that I can recall,

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described Federal Reserve policy

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in terms of what it anticipated would happen

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to the quantity of money

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rather than solely in terms of interest rates.

5:24

This is a major change.

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It is not yet, by any means, complete.

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You still have a very reluctant admission

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of the quantity of money

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into the arsenal of important magnitudes.

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However, it's on the verge of coming

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and therefore it's a time in which Burns coming in

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we'll have more sympathy for his point of view,

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we'll be in a position where he can, as it were,

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give the final push to a transformation

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of the considerations entering into the Federal Reserve.

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Now of course I don't want to exaggerate this,

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when I say the right time, I mean the right time

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compared to three or four years ago.

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It would have been far better if he had come in last January

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because had he come in, perhaps the Federal Reserve

6:07

would have avoided the mistake,

6:10

which in my opinion has been making in the past four months,

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of an unduly tight monetary policy

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of shifting from what was a reasonably correct stance

6:18

from December of 1968 to about May of 1969.

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Shifting from that to an extraordinarily

6:28

tight policy from May until now.

6:30

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Dr. Friedman, what consequences do you expect

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to follow from Dr. Burns' appointment?

6:37

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Well, of course you have to make

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a couple of qualifications in discussing this,

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two of which are particularly important.

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The first is that Martin does not leave

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until January 31st, 1970, at the end of his term.

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He is staying in to the very last day

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for which he is eligible to serve.

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Hence, Dr. Burns will not be in any position

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to exert any direct influence

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on the board's behavior until then.

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Yet, those months, as you know

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from my previous commentaries, are very critical months.

7:16

It is almost getting too late

7:20

for a change in monetary policy

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to avert a very serious recession.

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It's not quite too late, we've had about four months

7:28

of extraordinarily tight money.

7:31

If the Fed were now to switch the other way,

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it's still possible

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that you might avert a serious recession.

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But whether it switches or not

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does not, in any way, depend on Burns.

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This is worth emphasizing

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because if there is a serious recession next year,

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we should realize that this is to be attributed

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to the policies followed by the existing board

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and not attributed to Burns' influence.

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That's one qualification that's necessary.

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A second qualification that's necessary

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is that technically speaking,

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the chairman of the Federal Reserve Board

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is only an equal among equals.

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He has no special powers,

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the only special responsibility he has

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is to preside at meetings of the board

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and of the Open Market Investment Committee

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to set the agenda and call the meetings.

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Now this is, of course, a significant power,

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but he does not have any special power

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to make appointments to the research staff,

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or to exert influence on policy.

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All of these things are decided by a vote

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of the entire board or the Open Market Investment Committee,

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whichever is the relevant body.

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Yet, I do not want to overemphasize this feature.

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There is the old story about who sits

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at the head of a round table, and the answer is

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where McGonigle sits is the head.

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Well, that is something the case with Arthur Burns.

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He is a man of great personal force, of a very clear mind,

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effective in discussion and persuasion.

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Where Arthur Burns sits will be the head of the table

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regardless of whether it's a round table or a square table.

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So that I have no doubt that

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as chairman of the Federal Reserve,

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he will be able to exert enormous influence

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on what the Federal Reserve System does.

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This position of prominence and influence

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will be increased, of course, by his very close relations

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with President Nixon, which will give him

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a degree of authority that most chairmen

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of most Federal Reserve Boards or other bodies do not have.

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So, that we might still say how will his influence

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be exerted on policy and here I think

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there are a number of things that can be said.

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The first follows directly from what I have just said

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about his relation with President Nixon.

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The appointment of Dr. Burns more or less guarantees

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that there will not be a conflict

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between the policy of the board

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and the policy of the rest of the administration.

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Now, that needs to be interpreted carefully.

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I am not saying that the board will do

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what it is asked to do by the administration,

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I am saying something very different.

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That Dr. Burns, with his close relations

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with the president, with secretary candidate,

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with Paul McCracken, with the other people

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in the administration, will unquestionably participate

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actively and continuously in the forging

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of coordinated policy on the part of the two.

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The influence is as likely to run from him to them

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as from them to him.

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The important point is that there is almost certain

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not to be a conflict, not to be a situation

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such has developed in December 1966

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when President Johnson was berating the board

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for raising the discount rate.

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The second thing that needs to be said,

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as already indicated in describing his qualifications,

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is that his accession will continue the move

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toward greater degree of emphasis

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on the monetary aggregates,

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toward a lesser degree of emphasis

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on interest rates and credit conditions.

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This is a position which Dr. Burns

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has always consistently held, which is consistent

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not only with his training but with his actual convictions

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as they have been expressed.

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As I say, this is a continuation of a policy,

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a strengthening of a trend.

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It is not fortunately a new policy.

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I say fortunately because if he were the only one coming in

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with this view it would take time to get it adopted.

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Thirdly, in addition to a coordinated policy,

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in addition to greater emphasis on monetary aggregates,

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his accession, I think, bespeaks a steadier policy.

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Now, on this point, I think that it's very important

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to make clear two views that are often confused.

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When people discuss the so called monetarous position,

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they tend to lump in it two propositions

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which are capable of being separated.

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The one proposition is that the quantity of money

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or a similar monetary aggregate,

12:16

is an important economic variable

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that exerts a important influence

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on the course of economic activity.

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As applied to the Federal Reserve Board in particular,

12:27

this view is that the quantity of money is the thing

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which the Federal Reserve System should take as its target,

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as its indicator of policy.

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It is a magnitude that it should control

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and that it should set its sights on.

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That's one proposition.

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The second proposition is that

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the right course of monetary policy

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is to maintain a steady rate of increase

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in the quantity of money.

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Now, it so happens that I hold both of these views,

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both the view on money and the view

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that we should have a rule about monetary policy

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instead of discretion, but it is important to emphasize

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that it is possible to hold

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either one of these without the other.

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Dr. Burns, for example, clearly holds the first view,

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but he does not hold the second.

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As chairman of the Council of Economic Advisers,

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he came out, on a number of occasions,

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against the idea of a straightforward rule,

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and in favor of discretion about policy.

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To take the other combination,

13:32

the Committee for Economic Developments,

13:35

a program of a stabilizing budget policy,

13:38

places major reliance on fiscal policy

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as the influence affecting the economy,

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yet it argues that fiscal policy

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should be conducted according to a rule.

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So, each of these two halves can be separate.

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As I say, there has been a strong tendency to confuse them,

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largely, I believe, because of the fact

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that I have held both of them

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and I have been identified with the monetary view.

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I most recently became aware of this

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in the recent talk by Dewey Daane,

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which was much publicized in the papers up at Dartmouth

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in which he has a first section on monetarism

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which consistently treats these two as indissoluble.

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Well now, this takes me back

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to what I mean by a steadier policy.

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Dr. Burns will not be in favor of adopting a rule,

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but he will unquestionably be in favor

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of following a policy closer to a rule

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than that which the Fed has, in fact, followed.

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He is well aware that, historically and in experience,

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a major problem with the Fed has been a tendency

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to swing too far one way and too far the other.

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His whole instincts, his whole tendency

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to try to be reasonable and compromise,

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will lead him to want to follow a policy

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in the middle of this and therefore

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I think we can count on him to exert his influence

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in the direction of a much steadier course

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of monetary policy than we have had.

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Well, pending Dr. Burns' appointment,

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do you see any sign of a change in Federal Reserve policy?

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Well, I think there is some sign.

15:11

The newspapers have been emphasizing,

15:16

this is really going back to the earlier question,

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but it's suggested by your present question,

15:21

the newspapers and their comments on this

15:23

have been emphasizing over and over again

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that Dr. Burns is a strong opponent of inflation.

15:27

They have been identifying his stance with that of Martin's,

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but there is an enormous difference

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between their two stances.

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Martin's emphasis has been almost entirely verbal.

15:38

It is very hard to see from his actions

15:42

that he has been an opponent of inflation.

15:44

The inflation we now have was produced

15:46

by the Federal Reserve System under his chairmanship

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and he deserves and should be given, I say deserves,

15:50

I don't know whether deserves is the right word,

15:54

he should be given the credit or the blame

15:56

for the inflation that we have had.

15:58

Yet, he has a reputation of being a stern anti-inflationist

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because of his emphasis on words.

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He is an anti-inflationist in words but has, in fact,

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been an inflationist in deeds.

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Now, Dr. Burns will put far more emphasis on deeds

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and far less emphasis on words.

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And he will of course talk a strong anti-inflation stand

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and he means it and his actions will be that

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but because he has so much more sophisticated

16:29

an understanding of the interrelationship

16:32

between monetary magnitudes inflation unemployment,

16:34

he is likely to follow a policy which will,

16:38

in the short run point of view, be less anti-inflationary,

16:41

more gradual in attempt to get the inflation over with

16:44

while at the same time not paying too high a price

16:49

in the form of unemployment and recession.

16:51

Now, the fact that he has this opinion,

16:55

the fact that this board has been very severely criticized

16:57

by myself and other people in the past few months

17:00

for its extraordinarily tight policy,

17:02

it's likely to have an impact even before he is appointed.

17:06

I think I see some signs, not in the statistics at all

17:10

as yet, but in the talk and behavior

17:13

of the Federal Reserve Board and the systems

17:17

that they are getting ready

17:19

to change their behavior somewhat.

17:21

So, I would not be at all surprised

17:24

if in the next two or three months,

17:26

we saw a shift from a zero rate of monetary growth,

17:28

to a clearly positive rate of monetary growth.

17:33

Perhaps not as high as I would like to see it

17:37

in the short run in order to offset the over-tight policy

17:39

of the past few months, but at least something,

17:44

which will to some extent, ameliorate that policy.

17:46

Now, partly this is an expression of faith

17:49

and may be simply an example of my innate optimism.

17:52

I have been often wrong in the past

17:55

when I have seen the signs of an appropriate reaction

17:56

on the part of the Fed, but nonetheless, I must record

18:00

what seems to me to be the situation

18:03

and I do believe there is a significant chance

18:06

that you will have a move in this direction.

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Why, in your opinion Professor Friedman,

18:11

has the Fed been continuing so tight a policy?

18:13

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Well, this is a complicated and long story.

18:17

Fundamentally, while the people at the Fed,

18:20

have been coming around to the view

18:24

that the behavior of the quantity of money

18:26

exerts an influence on the course of events,

18:28

they continue to hold a view, and very, very strongly,

18:31

that the course of events is also affected very much

18:35

by people's expectations and attitudes.

18:39

They believe that the thing that really has to be done

18:42

is to kill the inflationary expectations

18:45

on the part of the public.

18:48

Having once made the mistake

18:50

of getting into too tight a stance,

18:51

they have been prevented from getting out of it,

18:55

they have been inhibited from getting out of it

18:59

by the fear that the slightest slackening

19:01

would be interpreted by the financial community

19:05

and other people sensitive to what's going on

19:08

as a sign that they're giving up the ghost

19:11

and that they're going to drop the anti-inflation fight

19:13

in the fear of recession that they're now going to expand,

19:19

once again we're off to the races.

19:22

This enormous emphasis on anticipations and expectations

19:26

has played a very large role in slowing down

19:32

a move on the part of the Fed.

19:35

Had they not been concerned with this,

19:37

I think it is highly likely

19:39

that they would have reacted favorably,

19:40

that is, they would have shifted their policy earlier.

19:42

Now, personally, I think this is an erroneous stance.

19:46

I believe expectations are important

19:50

but that expectations are dominated

19:52

not by what the Fed says,

19:54

not by what the monetary figures look like,

19:56

but by what actually happens in the economy.

19:58

The expectations are gonna be determined much more

20:01

by the apparently oncoming recession

20:03

with industrial production having declined

20:05

for two months in a row,

20:07

with unemployment having risen and so on,

20:08

that's going to have a far greater effect

20:10

on people's anticipations and the actual decline

20:12

in the rise of prices.

20:15

All of these would have a far greater effect

20:17

on anticipations than what the Fed says

20:19

or what it does in its narrow technical area.

20:22

But this is a general tendency

20:26

on the part of policy makers in Washington.

20:27

They tend to listen to the loud voices

20:30

not to the underlying trends.

20:33

People in the financial community make a lot of noise,

20:35

they talk a lot, they are close to Washington and so on,

20:38

and in my opinion, this emphasis on expectations

20:42

has been given altogether too great weight.

20:45

But nonetheless, I think this is a major factor

20:47

that explains why they have maintained

20:50

so tight a policy, so long.

20:52

The other factor is the one I emphasized much earlier

20:55

as to why they got into the tight policy

20:58

and that is because of a continued tendency

21:01

to look at interest rates

21:03

rather than at the quantity of money and in particular,

21:04

the fact that their operations in New York

21:07

are geared to controlling interest rates

21:09

and not the quantity of money.

21:11

All of this means that whenever there was some tendency

21:12

for interest rates to ease a little, to drop a little,

21:17

this was a signal to them that they were being unduly easy

21:20

and they tended to pull out reserves

21:23

which held interest rates up, but at the same time

21:25

produced a decline in the quantity of money.

21:28

One of the signs that we may be moving away from that

21:31

is the recent decline in interest rates,

21:34

which has been permitted to occur,

21:36

which the Fed could have offset if it had been willing

21:38

to tighten that monetary policy still more.

21:42

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Professor Friedman, in the few minutes left this morning,

21:45

may we turn to international policy.

21:47

Just before we recorded our last tape,

21:50

Germany set the mark free.

21:52

Time did not permit comment then.

21:55

What is your reaction two weeks after?

21:58

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Well, my first reaction is exactly the same

22:00

as it was initially, namely utter and complete delight.

22:03

As a long time proponent of flexible exchange rates,

22:06

I have been in favor of free exchange rates, I may say,

22:11

for as long back as I can remember.

22:14

And in the first full-length article

22:18

I wrote on this subject, I wrote in 1950,

22:20

19 years ago, which was an article

22:22

on the case for flexible exchange rates.

22:25

So, as a long time believer that flexible exchange rates

22:27

free market and exchange as in other things,

22:31

is the right solution for the present time.

22:34

I was delighted to see that Germany set the mark free.

22:37

Now, two weeks later, it is clear that having set it free

22:42

did not cause any of those tremendous waves of speculation,

22:45

of uncertainty, of disorganization,

22:53

that the opponents of flexible exchange rates have told us

22:56

we could expect whenever exchange rates were set free.

22:58

On the contrary, the most striking thing

23:01

about the setting of the German mark free,

23:04

is that it has had so little effect.

23:08

In fact, you look in the front page

23:10

of the Wall Street Journal these days,

23:13

and there is not a daily story

23:15

on what's happening to the price of the German mark.

23:16

There's not a daily story on the great inflows expected

23:18

of funds into or out of Germany.

23:22

It's as quiet as if nothing had happened,

23:24

you have to look back in the late pages

23:26

in their column on foreign exchange rates

23:29

to determine that the German mark has risen

23:33

to a premium of about 7% and has been staying there.

23:36

However, I'm overstating this.

23:39

This is not a true test.

23:41

The reason it is not a true test

23:43

is because it is widely believed

23:45

that the mark was set free, only temporarily,

23:48

that it will be repegged at an appreciated value.

23:53

As I talk, no action has been taken on this yet,

24:01

but the new government, the government of Willie Brandt

24:05

and of Schiller as finance minister

24:07

has only just taken office

24:10

and it has not yet had time to act on this.

24:12

By the time you'll hear this tape,

24:15

it may well be that they will have

24:17

repegged the mark at a higher rate.

24:19

I hope they will avoid the temptation.

24:22

I think few things could be better,

24:25

both for Germany and as an example of the rest of the world,

24:28

then for the Germans to let the mark continue to float

24:32

and in this way have a sensitive adjustment mechanism

24:35

that will enable them to follow

24:39

an appropriate internal policy

24:40

without being disturbed by external events.

24:42

But on the subject of international exchange rate

24:45

and exchange rate policies,

24:50

I am tempted to make a much broader comment.

24:52

Just after taping the last tape,

24:56

I went to a conference in New Hampshire

24:58

that was under the auspices

25:00

of the Federal Reserve Bank of Boston

25:02

on international monetary affairs.

25:03

It had a great many people, both from the academic world

25:05

of people who had worked on the subject

25:10

of international exchange, from the financial world,

25:12

from the banks, from the Federal Reserve System.

25:16

The topic, as I say, of the two day meeting

25:19

was the international financial mechanism.

25:23

I came away there from with a very, very clear impression.

25:28

The cat is out of the bag.

25:31

Whatever anybody may say or do, fixed exchange rates,

25:33

the adjustable peg of the kind we have known, is dead.

25:37

Now, let me not mistake this,

25:41

the majority of the people at that conference,

25:43

the majority of the talkers,

25:46

particularly the majority of the officials,

25:48

were all firmly wedded to the fixed exchange rates

25:51

of the past, to the adjustable peg system.

25:55

Yet, it was clear that the turn had come.

25:58

First of all, most of the academicians

26:03

were talking the other way.

26:07

They had begun to do this for some years now,

26:08

so that's not a new thing.

26:10

But second, the officials were beginning to talk in terms

26:11

of adjusting themselves to the evil necessity

26:16

of having changes in exchange rate.

26:19

They were reconciling themselves to a future.

26:22

It has been discovered

26:25

that you cannot continue along present lines.

26:26

I am very much impressed

26:30

by a number of experiences of this kind,

26:32

of the force of trends of this kind.

26:35

I have seen exactly the same thing develop

26:39

over the past five years in the monetary area

26:41

with the emphasis on the quantity of money

26:44

as opposed to credit magnitudes.

26:46

I see the same thing developing here

26:49

and there's a systematic pattern to it.

26:51

At the beginning, these radical unorthodox ideas

26:53

that you should pay attention to the quantity of money

26:58

or that exchange rates should be flexible,

27:00

I say at the beginning, 15 years ago.

27:02

The reaction of both the academic community

27:05

and the official and business and financial community

27:09

was one of ignoring them.

27:11

These ideas were so far outside the pale

27:13

that you didn't even have to talk about 'em.

27:15

The next stage, in both of these,

27:18

was a tendency to condemn 'em,

27:20

to say that these are obviously stupid ideas,

27:22

foolish ideas of irresponsible people,

27:25

that it is undesirable even to talk about.

27:28

And it goes without saying,

27:31

is a standard phrase at that stage,

27:33

it goes without saying that these are not desirable changes.

27:34

The next stage is to give a little bit more consideration

27:38

to them in the form of more extensive arguments

27:44

about why they're wrong.

27:47

The next stage, and here I may be exaggerating a little

27:49

and yet I think I'm giving a typical scenario

27:51

of what happens in these matters.

27:54

The next stage is the acceptance

27:56

by the opponents of the idea in a modified limited form,

28:01

in the form of saying, oh of course,

28:06

we knew all along that you should pay some attention

28:07

to quantity of money, we are eclectics,

28:10

but those other fellas, they're extremists.

28:12

They believe that the only thing you can look at,

28:15

the only thing that matters is money,

28:17

and similarly I have seen the same thing

28:19

in the international area.

28:21

They say of course, everybody knows

28:22

that when there are fundamental maladjustments

28:24

you need a change in the exchange rate,

28:26

but changes in the exchange rate

28:29

must be carefully controlled

28:30

and you must not listen to those foolish people

28:32

who say you should have a completely free rate.

28:35

Well, once you've reached that stage,

28:37

the cat's out of the bag.

28:39

From then on, it's only a question of time,

28:40

until those non-orthodox ideas become the new orthodoxy.

28:42

-

Thank you very much Professor Friedman.

28:47

Remember subscribers, if you have any questions

28:49

or comments for topics you would like to hear

28:52

discussed in this series, please send them

28:54

to Instructional Dynamics Incorporated,

28:56

166 East Superior Street, Chicago, Illinois 60611.

28:59

Dr. Friedman will be visiting with you again.

29:05

Tape 36 - Appointment of Arthur Burns to Fed, German Mark and Exchange Rates

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