Tape 175 - Money, Federal Reserve Bank of San Francisco, Monetary Targets, Eurodollars
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- | Hello, this is Rose Friedman | 0:02 |
inviting you to another of our biweekly conversations | 0:04 | |
with Milton Friedman, professor of economics | 0:07 | |
at the University of Chicago. | 0:10 | |
We are taping this interview early in September. | 0:11 | |
As usual, let's start with money. | 0:20 | |
Is there anything new in the monetary situation? | 0:22 | |
- | No, nothing really new. | 0:24 |
The latest monetary figures show | 0:27 | |
that there is a continuation, at least for the time being, | 0:29 | |
of the slower rate of monetary growth | 0:33 | |
that began at the end of June. | 0:35 | |
If you look at the narrow money supply, M-one, | 0:38 | |
the rate of growth in the past two months | 0:41 | |
has been at 2.6%, which is very low. | 0:43 | |
However, for longer periods, you still have | 0:50 | |
very high rates of course. | 0:52 | |
If you go back to the six months | 0:54 | |
from February to the latest figures, | 0:56 | |
the rate of growth is 8.6%. | 0:59 | |
For M-two, the past two months has shown only | 1:02 | |
an eight percent rate of growth. | 1:07 | |
Going back over six months, it's nearly 12%. | 1:09 | |
The question of course remains | 1:14 | |
whether this slower rate of growth | 1:17 | |
through the past two months | 1:21 | |
is a temporary aberration or will continue, | 1:23 | |
and for that, we will have to wait and see. | 1:26 | |
- | I wonder if your subscribers wouldn't be interested | 1:31 |
in the new publications coming from | 1:34 | |
the Federal Reserve Bank of San Francisco. | 1:35 | |
- | There is a new spirit blowing in the economic publications | 1:38 |
of the Federal Reserve Bank of San Francisco. | 1:42 | |
As all of my subscribers know, | 1:45 | |
the Federal Reserve Bank of St. Louis | 1:49 | |
has heretofore been the major fount | 1:50 | |
for monetary and economic data. | 1:53 | |
They have, without question, | 1:56 | |
been the most important single Federal Reserve bank | 1:57 | |
in the system out of the 12. | 2:01 | |
And anybody who wants to keep tabs | 2:03 | |
on current monetary and financial trends | 2:06 | |
will be well to benefit from the publications | 2:08 | |
which they put out, their weekly financial statistics, | 2:12 | |
their monthly monetary trends and economic trends. | 2:14 | |
Plus, their occasion of publication, | 2:21 | |
I guess it's quarterly, on rates of change | 2:24 | |
of various economic magnitudes in something like | 2:28 | |
10 or a dozen major nations of the world. | 2:31 | |
Now, it so happens that not long since, | 2:36 | |
one of the people who was at St. Louis, Michael Caron, | 2:41 | |
went to the Federal Reserve Bank of San Francisco | 2:46 | |
as a vice president in charge of research. | 2:49 | |
The result has been that San Francisco | 2:51 | |
has now shown a resurgence and a rather drastic change | 2:54 | |
in the kind of material they are putting out. | 2:58 | |
The latest of these was a spring 1975 issue | 3:01 | |
of their Business Review. | 3:05 | |
I might digress to note that the law which establishes | 3:07 | |
the Federal Reserve system requires | 3:10 | |
every one of the 12 Federal Reserve banks to issue, | 3:12 | |
I think, a monthly publication or a monthly review, | 3:16 | |
which it must make available to people | 3:24 | |
who request it without charge. | 3:26 | |
It's equally true of the other items that they produce | 3:29 | |
that you can get them without charge. | 3:32 | |
We're paying for them, of course, as a taxpayer, | 3:33 | |
and I object strenuously to this kind of a subsidy. | 3:36 | |
But as long as it's there, | 3:39 | |
we might as well take advantage of it. | 3:40 | |
At any rate, the Business Review | 3:42 | |
of the Federal Reserve Bank of San Francisco, | 3:45 | |
its number labeled spring 1975, | 3:47 | |
contains a coordinated series of articles on world inflation | 3:51 | |
which I think are extraordinarily good | 3:55 | |
and which I think everybody, | 3:57 | |
all of you would find interesting. | 3:59 | |
It starts with an article by Ed Shaw | 4:01 | |
on international money and international inflation | 4:05 | |
and continues with an article by Mike Caron | 4:07 | |
on the explanation of simultaneous inflation recession, | 4:10 | |
an article on central buying policy toward inflation | 4:14 | |
and on the interdependence on national policies. | 4:17 | |
But perhaps of even more immediate and continuing interest | 4:21 | |
is the fact that they have started to publish, | 4:26 | |
and the one I have here is dated May 1975, | 4:28 | |
a series of what they call | 4:32 | |
Pacific Basin Economic Indicators. | 4:35 | |
And these are very comparable to the series, | 4:39 | |
an international series that the Federal Reserve Bank | 4:42 | |
of St. Louis has been using, | 4:44 | |
except that they are for a different set of countries. | 4:46 | |
There is a little overlap. | 4:49 | |
Both of them include the United States and Japan, | 4:51 | |
but the San Francisco publication is for | 4:58 | |
the countries in what they call the Pacific Basin. | 5:01 | |
And the countries they cover are Australia, Canada, China, | 5:04 | |
Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand, | 5:07 | |
Philippines, Singapore, Thailand, and the United States. | 5:11 | |
And for each of these countries, they give | 5:14 | |
a triangle, such as St. Louis has made familiar, | 5:18 | |
showing rates of change between | 5:21 | |
any pair of quarters you choose to compare | 5:23 | |
for money supply, international reserves, consumer prices, | 5:27 | |
wholesale prices, manufacturing, employment, | 5:30 | |
industrial production, nominal gross national product, | 5:32 | |
real gross national product, imports and exports. | 5:37 | |
Now, some of these series aren't available, | 5:40 | |
but most of them are available. | 5:42 | |
You can get copies of this | 5:44 | |
by writing to the Federal Reserve Bank of San Francisco, | 5:45 | |
and certainly anybody who is interested | 5:48 | |
in the course of economic events in the Pacific Basin | 5:49 | |
I think would find them a very useful supplement | 5:52 | |
to the Federal Reserve Bank of St. Louis publications. | 5:55 | |
- | Some recent telephone calls you've been getting | 6:00 |
from people who are interested in your thoughts about | 6:02 | |
targets for long-term monetary growth | 6:05 | |
make me think that there's some confusion about | 6:08 | |
just what your targets are. | 6:11 | |
I wonder if you wouldn't spell them out a little more. | 6:12 | |
- | The confusion I think is on two different levels, | 6:17 |
and I think it is well to spell them out. | 6:20 | |
One is short versus long-term targets. | 6:22 | |
The second is to what money supply the targets apply. | 6:26 | |
Now, | 6:31 | |
let me take the long-term monetary targets | 6:35 | |
which I have had now for many years. | 6:37 | |
These have been a rate of growth in money | 6:40 | |
of something like three to five percent, | 6:47 | |
roughly corresponding to the expected rate of growth | 6:49 | |
in total output. | 6:52 | |
Now the monetary aggregate | 6:53 | |
for which I have used those percentages | 6:55 | |
has always been M-two, | 6:58 | |
currency plus total commercial buying deposits | 7:01 | |
in recent years other than large CDs. | 7:04 | |
That is a long-range target. | 7:11 | |
Now what does that target for M, | 7:14 | |
because over the long range, | 7:17 | |
that would imply roughly zero price rise. | 7:19 | |
With respect to that monetary total, | 7:23 | |
velocity of circulation has been relatively constant | 7:28 | |
over recent years. | 7:30 | |
For earlier periods, the velocity was declining. | 7:32 | |
It may decline again in the future. | 7:35 | |
So that's why it's put as a range of three to five percent. | 7:38 | |
On the whole, the way that range was attained | 7:43 | |
was that real output growth over a hundred year period | 7:44 | |
has been something like three and a half percent. | 7:47 | |
The rate of velocity has declined | 7:52 | |
by about one percent a year | 7:54 | |
so that to keep stable prices would have required | 7:56 | |
over that period something like four and a half percent | 7:59 | |
per year increase in M-two. | 8:01 | |
That's why I have always put it as something like | 8:04 | |
three to five percent. | 8:06 | |
Now the question is what does that imply | 8:08 | |
for other monetary aggregates. | 8:09 | |
In the post-war period, | 8:12 | |
M-one has risen decidedly less rapidly than M-two, | 8:14 | |
indeed by something like three percent a year less rapidly. | 8:18 | |
The reason for that is very easy to find. | 8:22 | |
In the post-war period, | 8:24 | |
we have had a substantial rise in prices. | 8:26 | |
Inflation has, well, I'm not stating that correctly. | 8:31 | |
We have had a rise in the rate of inflation. | 8:35 | |
As the rate of inflation has risen, | 8:38 | |
interest rates have risen. | 8:39 | |
As interest rates have risen, | 8:41 | |
it has become more and more costly | 8:44 | |
to hold cash in the form of demand deposits. | 8:45 | |
This is because of Regulation Q. | 8:49 | |
Regulation Q is ordinarily understood as | 8:51 | |
setting maximum limits on the rates paid on time deposits, | 8:54 | |
but one provision of it provides for a zero rate of interest | 8:58 | |
on demand deposits, that is, a prohibition | 9:01 | |
of interest on demand deposits. | 9:04 | |
Consequently, as interest rates rise, | 9:06 | |
the indirect way by which banks are able to pay interest | 9:09 | |
on demand deposits become less efficient | 9:12 | |
and there's more and more pressure | 9:14 | |
to get out of demand deposits and into other things. | 9:16 | |
As a result, M-one has risen at about | 9:18 | |
three percent per year less than M-two. | 9:21 | |
Thus, if this were to continue, | 9:24 | |
corresponding to the rate of growth of M-two, | 9:27 | |
three to five percent would be | 9:30 | |
a zero to two percent rate of growth of M-one. | 9:32 | |
However, I believe it would be invalid | 9:35 | |
to make that judgment over a long period. | 9:37 | |
The reason is that if you really got M-two | 9:41 | |
down to three to five percent, | 9:43 | |
even with Regulation Q in effect, | 9:45 | |
the rate of inflation would taper off so sharply. | 9:48 | |
Interest rates would fall, | 9:52 | |
and there would no longer be such a great incentive | 9:54 | |
to economize in M-one. | 9:56 | |
As a result, I believe the rates of growth | 9:58 | |
of M-one and M-two would come closer together. | 10:00 | |
This question of which particular monetary total you take | 10:03 | |
is of very little importance | 10:07 | |
looked over any longer range period | 10:09 | |
and certainly if Regulation Q is eliminated. | 10:11 | |
The only period in which you have had | 10:15 | |
substantial differential movements | 10:17 | |
between different monetary concepts | 10:19 | |
is when Regulation Q has been significant | 10:21 | |
and has tended to bite. | 10:24 | |
As a consequence, | 10:27 | |
I believe that that argument over | 10:31 | |
which monetary total you use is largely a smoke screen | 10:33 | |
thrown up by the Federal Reserve people and other people | 10:36 | |
who are very unwilling to adopt | 10:41 | |
a specific monetary target. | 10:43 | |
Now the second problem is | 10:46 | |
the question of getting from where we are now | 10:50 | |
to where we want to go. | 10:53 | |
At the moment, rates of growth of M-one | 10:55 | |
have been over the past few years, | 10:58 | |
I'm sorry, of M-two, have been over the past few years | 11:01 | |
in the area of something like 10% or more. | 11:04 | |
To come from 10% down to three to five percent | 11:09 | |
is to require a very substantial change. | 11:11 | |
Rates of growth of M-one have been about | 11:15 | |
three percentage points less | 11:18 | |
or somewhere in the neighborhood of about seven percent. | 11:20 | |
And that has the recent targets announced by the Fed | 11:23 | |
of five to seven and a half percent imply, | 11:27 | |
have been for M-one, they named a larger target | 11:31 | |
of something like eight to 10 and a half percent for M-two. | 11:34 | |
Now those rates of growth, | 11:39 | |
if they were continued indefinitely, | 11:40 | |
imply something like a seven percent rate of inflation. | 11:42 | |
It happens to have been the case | 11:46 | |
that during this period when M-one has been rising | 11:48 | |
less rapidly than M-two, | 11:51 | |
the rate of rise in M-one has been roughly equal | 11:53 | |
to the rate of inflation. | 11:55 | |
Now I know some of you will immediately say, | 11:57 | |
well, that doesn't work for 1973 and '74. | 11:59 | |
After all, M-one never got up to ranges of 12 and 14% | 12:02 | |
and the rate of inflation did. | 12:06 | |
But that is, as I have stressed repeatedly, | 12:08 | |
is highly misleading. | 12:10 | |
You must take the whole period from 1971 to '74 or '75 | 12:12 | |
as a whole | 12:16 | |
because in the early part of that period, | 12:17 | |
you had price and wage control, | 12:19 | |
which made the recorded rates of inflation | 12:21 | |
less than the true rates of inflation. | 12:23 | |
Once price control broke, | 12:25 | |
you had inflation rates breaking out into the open | 12:27 | |
and you had a jump to the double digit rates. | 12:29 | |
But that was mostly just a catching up | 12:33 | |
or a case in which the index has started to tell the truth. | 12:35 | |
If you take the average rate of inflation | 12:40 | |
over the three, three and a half years | 12:42 | |
from early 1971 to the end of '74, | 12:44 | |
you get a rate of inflation | 12:48 | |
of about seven and a half percent. | 12:49 | |
And if you look at the rate of growth of money | 12:52 | |
over that same period or better, | 12:54 | |
over a period earlier than that | 12:57 | |
since as I've emphasized, | 12:59 | |
there's something like a one to two year lag | 13:00 | |
between a rate of change in money | 13:02 | |
and a rate of change of inflation, | 13:04 | |
you will again get something a little lower, | 13:06 | |
maybe six and a half, seven percent, | 13:08 | |
maybe seven percent for the rate of growth of M-one | 13:11 | |
so that the rate of growth of M-one | 13:14 | |
is of the same order of magnitude as the rate of inflation. | 13:15 | |
Similarly, if you were to continue for the future | 13:19 | |
with a rate of growth of M-one | 13:21 | |
between five to seven and a half percent, | 13:23 | |
that would imply a rate of inflation of about seven percent. | 13:25 | |
And you can say therefore | 13:29 | |
that that long-range target would be very inflationary. | 13:31 | |
However, it is not a long-range target. | 13:35 | |
As I've stressed here, in his verbal statements, | 13:39 | |
Chairman Burns has always emphasized | 13:43 | |
that this is a short-range target | 13:45 | |
and that over the longer range, | 13:48 | |
in order to get inflation under control, | 13:49 | |
it is essential to have | 13:51 | |
a decidedly lower rate of monetary growth. | 13:52 | |
I agree strongly with that. | 13:55 | |
And the question is now, | 13:57 | |
how fast do you go from where you are now | 13:59 | |
to where you would like to go. | 14:02 | |
That's not a question that you can answer, I think, | 14:03 | |
with the same confidence as you can state | 14:06 | |
your long-range targets. | 14:08 | |
As long as our actual rates of monetary growth | 14:09 | |
were not far from the desirable long range rates, | 14:12 | |
I had been in favor of going there in one fell swoop | 14:15 | |
and getting it over and done with. | 14:18 | |
But it's not clear that that's desirable | 14:21 | |
once you get as far away as you are. | 14:23 | |
And you can make a fairly strong case | 14:25 | |
for going there gradually. | 14:27 | |
For example, a fairly sensible proposal | 14:29 | |
would be to say, well, let's accept | 14:32 | |
these short-range targets of eight to 10 and a half percent. | 14:35 | |
Let's say, nine, nine and a half percent | 14:38 | |
over the next year for M-two. | 14:40 | |
And then let's bring those down by something like | 14:43 | |
two percentage points a year | 14:46 | |
so that you get down, let's say, | 14:49 | |
within about three years | 14:53 | |
to that range of three to five percent | 14:56 | |
that I was talking about. | 14:59 | |
That would mean you would have steady pressure | 15:00 | |
to slow down the rate of price inflation, | 15:02 | |
but you would not require it to be done immediately. | 15:05 | |
You could take your time. | 15:07 | |
And therefore, you would suffer less | 15:09 | |
from any temporary unemployment | 15:11 | |
or any temporary difficulties. | 15:13 | |
That's what would be desirable. | 15:16 | |
I am very far, as you know indeed, from predicting | 15:17 | |
that that's what in fact you will have happen. | 15:20 | |
- | A question you got recently from | 15:26 |
Mr. Van Gorkom, president of Trans Union Corporation, | 15:29 | |
seems like an interesting one for you, | 15:33 | |
would be an interesting one for your subscribers. | 15:35 | |
He writes, a recent issue of Barron's | 15:38 | |
contained an interview with Jacques Rueff, | 15:40 | |
which raises again the general question | 15:43 | |
of the effect on our economy | 15:45 | |
of the increase in the Euro dollar market. | 15:46 | |
He states, quote, we will not get out, that's Rueff. | 15:49 | |
We will not get out of this recession | 15:52 | |
as long as we have an inconvertible dollar | 15:55 | |
because it increases the liquid dollar liabilities | 15:57 | |
held by foreigners and that stokes inflation, | 16:00 | |
which in turn pushes up interest rates | 16:03 | |
and that causes recession. | 16:05 | |
The crux of the question is | 16:07 | |
that monetary inconvertibility | 16:09 | |
increases international liquidities, | 16:11 | |
which provide inflation and then recession, end of quote. | 16:13 | |
Would you please comment on this statement | 16:17 | |
with particular attention to the oft-repeated question, | 16:18 | |
does a growth in the Euro dollar market | 16:21 | |
in any way affect the domestic economy supply, | 16:23 | |
domestic money supply of the United States? | 16:26 | |
- | Let me go at that in two parts, | 16:29 |
first talking about Jacques Rueff's statement | 16:33 | |
and then about Mr. Van Gorkom's question | 16:35 | |
on the Euro dollar market. | 16:37 | |
Jacques Rueff is an old friend of mine | 16:39 | |
and a very able man for whom I have a great deal of respect. | 16:42 | |
His analysis of the sources of our present problem | 16:46 | |
is, I believe, it's penetrating | 16:49 | |
and overlaps a great deal with my own. | 16:53 | |
But he and I part company very much | 16:57 | |
on the question of what ought to be done about it. | 17:00 | |
And this quotation brings out that difference. | 17:03 | |
Let me go at it rather backward. | 17:10 | |
What Mr. Rueff would like to say would be | 17:13 | |
a dollar convertible into gold at a new fixed price. | 17:15 | |
He would be in favor of a price | 17:20 | |
of something like $150 to $200 an ounce for gold, | 17:23 | |
and his proposal is that that price be reestablished, | 17:27 | |
that the US agree to convert the dollar into that price. | 17:32 | |
He recognizes that even if you | 17:36 | |
value US gold reserves at that price, | 17:40 | |
that would not be a large enough amount of gold | 17:42 | |
to enable dollar convertibility | 17:45 | |
we would maintain necessarily. | 17:47 | |
And so, he has proposed that various countries | 17:49 | |
lend to the United States their gold | 17:51 | |
revalued at this higher price. | 17:54 | |
Now, it's not an absurd approach. | 17:57 | |
On the contrary, if indeed | 18:00 | |
you could get a situation in which | 18:02 | |
the various countries of the world | 18:05 | |
would be willing to accept the discipline | 18:06 | |
of a real gold standard of real convertibility and the rest, | 18:08 | |
it might be a cheap price to pay. | 18:11 | |
But I think it is an utterly unrealistic | 18:14 | |
and therefore undesirable approach | 18:16 | |
because I believe that under present political circumstances | 18:19 | |
there is no country, no major country in the world | 18:23 | |
that would be willing to submit itself | 18:26 | |
to the discipline of the gold standard in that sense. | 18:28 | |
I cannot conceive, for example, | 18:30 | |
that the United States would be willing to go through | 18:32 | |
a long, painful recession or depression, | 18:35 | |
merely in order to be sure, | 18:37 | |
to be able to maintain the ability | 18:39 | |
to pay out dollars for gold at whatever artificial | 18:41 | |
or arbitrary price you want. | 18:45 | |
I believe that the inflation has much deeper roots, | 18:48 | |
which are fundamentally in the expanded role of government | 18:51 | |
and in the expanded size of government | 18:57 | |
as a fraction of the national income, | 18:58 | |
on the increased difficulty of financing | 19:01 | |
such governmental expenditures | 19:03 | |
by taxes voluntarily borne by the public | 19:05 | |
and hence on the pressure to rely increasingly | 19:09 | |
on inflation as a method of taxation. | 19:11 | |
Now, from Mr. Rueff's point of view, he says | 19:16 | |
that an inconvertible dollar increases | 19:20 | |
the liquid dollar liabilities held by foreigners. | 19:24 | |
Now that's a curious statement | 19:29 | |
because I would have argued earlier | 19:31 | |
that the relationship was the other way, | 19:36 | |
that when we have a convertible dollar, | 19:38 | |
not convertible into gold particularly | 19:40 | |
but with fixed exchange rates between currencies, | 19:42 | |
when, for example, Germany was committed to maintaining | 19:46 | |
the market at a par with the dollar, | 19:49 | |
then under those circumstances, | 19:54 | |
German dollar liabilities increased | 19:56 | |
because Germany had to accept, | 19:59 | |
had to accept dollars in return for marks. | 20:03 | |
But Mr. Rueff argues the other way. | 20:09 | |
He argues that, | 20:12 | |
I guess he would answer to that, | 20:15 | |
well that's true if you have a fixed exchange rate | 20:17 | |
in terms of dollars. | 20:21 | |
But if you had had gold, | 20:22 | |
the Germans instead of taking dollars | 20:24 | |
could have turned the dollars in for gold, | 20:26 | |
and that would have forced such pressure on the US | 20:28 | |
to contract and it could have continued to inflate, | 20:31 | |
and under those assumptions, he would be right. | 20:33 | |
But what is the situation with an inconvertible dollar | 20:37 | |
in both senses, | 20:39 | |
with a situation in which you have essentially | 20:40 | |
floating exchange rates? | 20:42 | |
The situation is that | 20:44 | |
nobody has to hold any liquid dollar liabilities | 20:46 | |
unless he wishes to do so. | 20:48 | |
The complaint which comes over and over again from France, | 20:51 | |
where Mr. Rueff is very influential, | 20:55 | |
is a complaint not against flexible exchange rates | 20:58 | |
but against the laws of arithmetic. | 21:01 | |
The objection which the French make | 21:04 | |
is that they would on the one hand | 21:06 | |
like to sell more than they buy, | 21:08 | |
they would like to have a balance of payment surplus, | 21:10 | |
they are very anxious to export relative to their imports. | 21:13 | |
On the other hand, they don't want to accumulate | 21:16 | |
foreign exchange. | 21:18 | |
Well, that's a neat trick if you can do it, but you can't. | 21:20 | |
Under any kind of a system, | 21:23 | |
total outflows have to balance total inflows. | 21:25 | |
You have double entry bookkeeping. | 21:28 | |
And if the French are going to sell more than they buy, | 21:30 | |
then they have to be prepared in some way or another | 21:33 | |
to lend the people who buy from them | 21:36 | |
more than they sell to them. | 21:39 | |
That is to say, they either have to accumulate | 21:41 | |
dollar liabilities or pound liabilities or mark liabilities | 21:44 | |
in the form of notes or promises to pay | 21:48 | |
or trade bills or whatnot, | 21:54 | |
or they have to be willing to accumulate the difference | 21:56 | |
in the form of the currencies of the US | 22:00 | |
or of the Germans or whatnot. | 22:03 | |
Now of course, I should hasten to add | 22:07 | |
I am being somewhat hypothetical along Rueff's line | 22:10 | |
because in fact, France is one of the countries | 22:14 | |
that has been inflating rather more than others. | 22:17 | |
It has a very high rate of inflation | 22:19 | |
from its internal policy. | 22:22 | |
But let's go back to Mr. Rueff's case. | 22:24 | |
Under inconvertible dollars in the two senses | 22:27 | |
of flexible exchange rates and no convertibility into gold, | 22:30 | |
nobody has to add to his dollar balances | 22:32 | |
unless he wishes to. | 22:37 | |
Now it is true | 22:38 | |
that many foreigners hold dollar balances, | 22:40 | |
either in the form of Euro dollar deposit, | 22:43 | |
of deposits at Euro dollar banks, | 22:46 | |
or in the form of deposits in the United States | 22:49 | |
or in the form of strict US currency | 22:54 | |
or in other forms. | 22:58 | |
But they hold that because they believe | 23:00 | |
that that is a better way in which to keep their assets | 23:02 | |
than any other. | 23:05 | |
This does not stoke inflation. | 23:08 | |
What stokes inflation is the expansion | 23:11 | |
in the quantity of money in each country separately. | 23:14 | |
What stokes inflation in France | 23:17 | |
is that the French print or create too many francs. | 23:19 | |
Now it is true | 23:24 | |
that the availability of dollars to be held | 23:25 | |
makes a given rate of expansion of the French money | 23:29 | |
more inflationary than it otherwise would be | 23:33 | |
because it gives people a way to hold assets | 23:35 | |
which lessens the demand for francs. | 23:39 | |
To put it another way, it makes the printing of francs | 23:42 | |
a less efficient tax because there's a smaller tax base | 23:46 | |
because people can substitute the holding of dollars | 23:50 | |
for the holding of francs. | 23:52 | |
But that's the only sense in which it stokes inflation. | 23:54 | |
There is no, I cannot agree with Mr. Rueff's statement | 23:58 | |
that monetary inconvertibility | 24:02 | |
increases international liquidities, | 24:05 | |
which provide inflation and then recession. | 24:07 | |
On the contrary, | 24:09 | |
one of the great arguments that has been made | 24:10 | |
against in the past floating exchange rates | 24:12 | |
is that it would make it difficult for people | 24:15 | |
to have adequate liquidity in the international area | 24:17 | |
because there would be no assurance | 24:20 | |
about the convertibility of one form of currency | 24:24 | |
into another. | 24:27 | |
Now let me turn to Mr. Van Gorkom's own question | 24:29 | |
about whether a growth in the Euro dollar market | 24:32 | |
in any way affects the domestic money supply | 24:34 | |
of the United States, | 24:36 | |
which is not strictly related to Rueff's point | 24:40 | |
but is indirectly related. | 24:43 | |
Here, the question is partly one of definition. | 24:46 | |
As we now define | 24:50 | |
the domestic money supply of the United States, | 24:52 | |
the domestic money supply of the United States includes | 24:54 | |
deposits at US banks by foreign banks. | 25:01 | |
Those foreign banks, | 25:07 | |
some of them are in the Euro dollar business and in part, | 25:08 | |
they hold dollar balances at US banks on that account | 25:12 | |
as reserves, so to speak, for their Euro dollar liabilities. | 25:17 | |
Now, to that extent, a growth in the Euro dollar market | 25:22 | |
does not affect the domestic money supply | 25:28 | |
of the United States as so defined, | 25:30 | |
but may mean that a larger fraction of it | 25:32 | |
is held by foreign banks rather than by domestic banks. | 25:35 | |
The total domestic money supply of the United States | 25:39 | |
is fundamentally determined | 25:41 | |
by the volume of high-powered money | 25:43 | |
which the Federal Reserve makes available. | 25:45 | |
Given any volume of high-powered money, | 25:50 | |
there will be a given total domestic money supply. | 25:53 | |
Now again, in a full analysis, | 25:56 | |
I would have to qualify that a little | 25:58 | |
because the total money supply that can be supported by | 26:00 | |
a given volume of high-powered money, | 26:03 | |
that is currency plus bank balances at Federal Reserve banks | 26:05 | |
money that the Federal Reserve creates, | 26:10 | |
the total money supply that can be | 26:12 | |
supported by a given amount of high-powered money | 26:14 | |
depends somewhat on just how | 26:16 | |
that money supply is distributed | 26:18 | |
because of different Reserve requirements for New York banks | 26:20 | |
and for country banks and the like. | 26:22 | |
But that's a matter of very secondary importance. | 26:24 | |
So to go back, for a given high-powered money supply, | 26:27 | |
there will be a given domestic money supply | 26:31 | |
in the United States. | 26:34 | |
The fraction of that, | 26:35 | |
which at present is held by foreign banks, | 26:36 | |
may be affected by the growth of the Euro dollar market. | 26:39 | |
But that is a very trivial and minor effect. | 26:42 | |
Now I believe, with respect to the Euro dollar market, | 26:45 | |
there are two other issues which are more significant. | 26:48 | |
Issue number one, which has | 26:51 | |
caused a good deal of uncertainty among people, | 26:54 | |
are Euro dollars created dollars | 26:58 | |
or are they dollars transferred out of the money stock? | 27:00 | |
The answer is they are almost to the whole created dollars. | 27:03 | |
The existence of the Euro dollar market | 27:06 | |
for a given US domestic high-powered money and money supply | 27:09 | |
makes total world money larger than it otherwise would be. | 27:13 | |
That I think there is no doubt about | 27:19 | |
and almost everybody by now has come to agree with that. | 27:21 | |
Second question. | 27:24 | |
Does an expansion in the Euro dollar market | 27:25 | |
for a given high-powered money in the United States | 27:29 | |
add to the inflationary pressure in the United States? | 27:33 | |
The answer is yes but to a very small extent. | 27:35 | |
Why? | 27:39 | |
Because a large fraction of Euro dollars | 27:40 | |
are held by people instead of holding francs, | 27:42 | |
instead of holding pounds, instead of holding marks. | 27:45 | |
To that extent, it adds to the pressure on the world | 27:49 | |
rate of inflation, on the world price level. | 27:52 | |
But only that part which is held | 27:56 | |
as an alternative to holding US dollars | 27:58 | |
affects the US inflation rate, | 28:02 | |
and that I think is empirically a very small magnitude | 28:04 | |
if you look at the figures. | 28:07 | |
You have to compare the Euro dollar holdings. | 28:08 | |
First of all, you have to eliminate Euro bank balances. | 28:11 | |
Second, you must compare them with a broad measure | 28:13 | |
of the money supply like M-two or a still broader aggregate. | 28:16 | |
And empirical work which has been done | 28:19 | |
suggests that the effect is empirically very small. | 28:22 | |
Now another question, | 28:26 | |
a very different question that is asked, | 28:27 | |
does the existence of the Euro dollar market | 28:30 | |
affect the ability of the Federal Reserve | 28:32 | |
to control the money supply? | 28:34 | |
The answer to that is no. | 28:36 | |
It may affect what money supply they choose to control. | 28:38 | |
The Federal Reserve can take M-one, for example, | 28:42 | |
as presently defined as a subjective. | 28:46 | |
It can control that. | 28:48 | |
Given that it controls that, | 28:49 | |
it cannot also simultaneously control M-two, M-three, | 28:51 | |
or any of those plus the Euro dollar total. | 28:54 | |
If the Federal Reserve decided | 28:58 | |
that it wanted to control a total, | 29:00 | |
including the Euro dollar liability, it could do so, | 29:02 | |
provided it had the figures available | 29:06 | |
on Euro dollar liability. | 29:09 | |
But in doing so, it would sacrifice its ability to control | 29:11 | |
M-one or M-two. | 29:14 | |
I think these two separate issues have been confused. | 29:16 | |
One, what total is it sensible | 29:19 | |
for the Federal Reserve to try to control? | 29:22 | |
And second, does it have the ability | 29:24 | |
to control that total? | 29:26 | |
I think the answer to the second is | 29:28 | |
that the Euro dollar market in no way whatsoever | 29:30 | |
reduces the ability of the Federal Reserve | 29:32 | |
to control whatever total it chooses to control, | 29:34 | |
though it may conceivably, though not in my opinion, | 29:37 | |
change the total it's desirable | 29:41 | |
for the Federal Reserve to control. | 29:44 | |
I continue to be unrepentant in believing | 29:46 | |
that the total that is desirable to control is M-two, | 29:48 | |
though I must say I would be in favor of | 29:52 | |
modifying that total by eliminating the deposits | 29:56 | |
of foreign banks in the United States. | 29:58 | |
But aside from that minor change, | 30:00 | |
I think it's desirable for them to control M-two, | 30:01 | |
and I think we ought to stop paying so much, | 30:04 | |
worrying so much about Euro dollars. | 30:06 | |
They are a smoke screen, not a real problem. | 30:09 | |
- | I'm afraid we've come to the end of our time. | 30:12 |
Thank you very much. | 30:14 | |
Remember subscribers, if you have any questions or comments, | 30:15 | |
please send them to Instructional Dynamics Incorporation, | 30:18 | |
Incorporated, 450 East Ohio Street, | 30:22 | |
Chicago, Illinois, 60611. | 30:25 | |
We will be visiting with you again in two weeks. | 30:29 |
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