Tape 16 - Divergent Monetary Trends / Paul A. Samuelson papers, 1933-2010 and undated / Duke Digital Repository

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Hello, this is William Clark,

0:02

financial editor of the Chicago Tribune, welcoming you,

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once again, on behalf of Instructional Dynamics

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to this weekly series of commentaries

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on current economic development.

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Once again, we are visiting with one of the nation's

0:14

leading economists Professor Milton Freedman

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of the University of Chicago.

0:19

Dr. Freedman, some of the financial writers

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are saying that money is very tight

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and that the Federal Reserve people are

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stepping on the brakes pretty hard.

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And others are saying just the opposite.

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And I find this quite confusing.

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I wonder if you could help me out of this confused state.

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Well, the funny thing is, that probably

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all of them are right.

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The situation is confusing and not really the commentaries.

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In all the period that I have been watching

0:46

these monetary totals, which is a considerable time,

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I do not know of any other period

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in which it is so hard to read the monetary figures

0:53

and see exactly what they are saying.

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The most interesting thing,

1:01

the way to show what the problem is, I think,

1:04

is to explain how different indicators

1:06

are saying different things.

1:09

In general, there are three indicators

1:12

that are worth watching from this point of view

1:14

from the point of view of monetary supply.

1:16

First, there's the broad monetary total of currency,

1:19

plus all commercial bank deposits.

1:25

This is both demand and time.

1:28

This is a total that has special importance

1:30

because we've had evidence on it

1:33

for a very long period of time, but also,

1:36

because it comes closest to corresponding

1:39

to the total assets of the Viking system,

1:41

(indistinct) which the Federal Reserve pays attention to.

1:44

And so, it has a great deal of relation,

1:47

as I mentioned in an earlier take,

1:49

they've been putting emphasis on bank credit proxy,

1:51

so called, which is very close to this concept.

1:55

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Yes.

1:57

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So, there's first of all there's broad total,

1:58

which for convenience in referring to,

1:59

I'll call M2, which is a jargon, Capital M sub 2,

2:01

which is what the economists working on this

2:06

has come to adopt for it.

2:08

Second, there's a narrower total,

2:10

which is currency plus adjusted demand deposits,

2:12

which the Federal Reserve used to always refer to

2:15

as money supply and still uses the term money supply

2:19

to refer to.

2:21

We'll call that M sub 1, M1.

2:22

And the third, there is something which,

2:25

in the Federal Reserve jargon, is called High Power Money.

2:28

Which now tends to be called more nearly the Monetary Base.

2:33

Which is currency in circulation, the green stuff

2:37

plus deposits of the Federal Reserve.

2:41

That is it's really currency plus bank reserves.

2:44

It's high powered because it's the stuff such

2:48

that banks get more of it.

2:50

For each dollar they get, they can issue

2:53

the banking system, as a whole,

2:55

four or five dollars of deposits, so it has a multiplier.

2:58

That's why it's called High Power.

3:01

It's called the Monetary Base, for the same argument.

3:03

Because the argument is that this is a base

3:06

on which the quantity of money is erected.

3:08

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I see.

3:11

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Now look at these three things.

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Here's M2, here's M1, here's the base.

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And what are the facts on them?

3:15

As between, for M2,

3:17

the total quantity has been falling very, very sharply.

3:21

In fact, if you compare the level of M2 now

3:26

with the level of the, say on the average of December

3:29

or mid-December, it's been falling since then

3:32

at the rate of 5% a year.

3:34

Before that period, for the six months

3:37

before the middle of December,

3:39

it had been rising at the rate of 12% a year.

3:40

So you've gone in M2 from a rise of 12%

3:43

to a fall of 5%.

3:47

Which if you look at M2, you must say we've got

3:47

enormously tight.

3:50

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I can see that's a very sharp turnaround.

3:52

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So I think it's about as sharp

3:54

as any I know on the record.

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Second, however, suppose you look at M1.

3:58

Now, M1 prior to December,

4:00

was rising at a fairly rapid rate.

4:03

I think the figure was around six, or seven,

4:05

or eight percent, somewhere in that neighborhood.

4:07

For some reason, I don't have that figure exactly in mind.

4:09

But since, the beginning of December,

4:12

M1 has been horizontal, on the average.

4:14

That is the level of M1 now is roughly the same

4:17

as it was in early December.

4:20

In the meantime, there was a big spurt up and down,

4:22

an erratic movement, but on the average,

4:26

if you say, "where are you now?"

4:29

You'll have to say that for about six weeks now,

4:30

you've had, essentially, a rate of growth of one percent,

4:33

uh, zero percent per year in M1.

4:37

Well, that again is very tight

4:40

looking at it, as you go from eight percent,

4:42

or seven percent, six or seven percent,

4:44

to zero percent.

4:48

It's not as sharp a swing as M2, but it's still tight.

4:49

So, if you look at those two, you have to say money is,

4:53

in that sense, tight.

4:55

But now, I go and look at the Monetary Base.

4:58

The Monetary Base, which is this additional High Power

5:00

money, they total that stuff is currently go up

5:03

at the rate of eight percent a year,

5:08

which is faster than it was before December.

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Before December, it was going up at something like

5:12

six or seven, now it's going up

5:13

at about eight percent a year.

5:15

And so you have these three basic totals

5:16

that are each telling a different story.

5:19

And the real thing you have to do at the moment,

5:21

is to try to understand the differences among them.

5:23

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What is the reason for this seeming discrepancy?

5:26

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Well, suppose we start with M2,

5:29

'cause that's kind of the bay place to start at, I think.

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Alright.

5:33

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And there, the explanation is very, very simple.

5:34

The explanation there has to do with regulation Q.

5:37

As you know, regulation Q is

5:41

a regulation whereby the Federal Reserve system

5:44

sets a maximum rate on the interest,

5:49

a maximum level on the rate of interest,

5:53

that member banks may pay for time deposits.

5:55

Now this rate of interest is a complicated structure

6:00

of maximum rates because it applies

6:02

to household safety deposits, and what's more important

6:04

for our present purpose, large certificates of deposits.

6:09

That is, certificates of $100,000 and over,

6:13

which are new market instrument

6:16

developed over the last six or seven years,

6:20

but now very large in scope,

6:23

amounting to over 20 billion dollars in volume,

6:25

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Hmmm...

6:28

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Issued by the large banks in denominations of $100,000

6:29

and over for periods of time ranging

6:31

from one month to six months and over.

6:34

The maximum rate, which, at the moment,

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the banks are permitted to pay on this,

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and this is a rate which has prevailed

6:42

since April of last year.

6:45

It hasn't been changed for almost or close to a year.

6:46

That maximum rate is 6.25%

6:50

on the very longest certificates.

6:54

Those that have a maturity of 180 days or more.

6:57

The rate is 5.75% for maturities of, 90 day maturities.

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Now, before December,

7:07

of the past year,

7:11

those rates were very attractive compared to market rates

7:12

that were available to the corporations

7:16

that are the main investors

7:19

in these certificates of deposit.

7:21

The alternative rates they could get on treasury bills,

7:23

on open market commercial paper, and so on.

7:25

One of the main, less than the rate

7:27

they could get on the CDs.

7:30

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I see.

7:32

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Of course, the next question you ask

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is "How come the banks were able to pay such rates?"

7:34

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That's right. (chuckles)

7:36

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And the answer is, the banks were not using

7:37

the funds they got in this way

7:39

to invest in treasury bills or not very much.

7:40

Because that wouldn't have paid them.

7:45

They could pay more in receiving that,

7:45

they were using it to make loans,

7:48

to make it a higher rate of 7% or more, business loan.

7:50

Or they were using it for investments or mortgages

7:54

or other paper, which had a higher rate.

7:57

The bank was engaging in what we like to call

7:59

an intermediary function.

8:03

The commercial bank was borrowing from the corporations.

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And using it for these various investments

8:07

and the commercial banks are very efficient

8:09

and a sensitive mechanism for doing this,

8:11

so that they, this is a very efficient market system to do.

8:14

But now, beginning about December,

8:19

the short term interest rates, long term interest rates,

8:21

all interest rates in the market, rose quite a bit.

8:25

They rose, well, December, late November,

8:27

but from the end of November through December, they rose.

8:31

They've remained high since.

8:35

They have not recently been rising as rapidly

8:38

as they did in December.

8:40

December they rose a good bit

8:42

and since, through January, February,

8:43

they have been relatively stable.

8:46

They've shown some rise, but they stayed at a high level.

8:49

But the regulation Q rates have not been changed.

8:52

This means that right now, the rate of interest

8:55

that you can get on a three month treasury bill

8:59

is higher than the maximum rate

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commercial banks are permitted to pay on

9:03

a three month CD.

9:05

The rate you can get on commercial paper

9:09

is probably also higher,

9:11

and these rates are indeed very close to the rates,

9:13

the maximum rates, the commercial banks are permitted to pay

9:15

on six months paper.

9:19

Well, the result of this is,

9:20

to use this other very long word that has become customary,

9:22

disintermediation, it's an awful word.

9:26

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Yes, it is.

9:28

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But, what does that mean?

9:30

That means that here's a corporation,

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that before this was buying a CD

9:35

and it now, the bank was using these funds

9:39

for its investments.

9:43

Now, the corporation says, "Well, this is silly.

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Instead of my buying the CD, I'll go to the market

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and buy a treasury bill or commercial paper

9:49

directly for myself."

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Now, the reason it's called disintermediation is simple.

9:53

Consider what isn't the fact,

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but it's sort of a hypothetical case,

10:00

which will make it first.

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Let's suppose that the commercial banks themselves

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had been buying precisely those things

10:07

that corporations are now buying.

10:09

Let's suppose that the commercial bank had been borrowing

10:11

through the CD of the corporation,

10:13

and using those funds to buy treasury bills

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or commercial paper.

10:19

Now, suppose the corporation

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simply buys the treasury bill directly.

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That is, the bank is now no longer used as an intermediary.

10:30

But then, from an economic point of view,

10:33

almost nothing has happened.

10:34

We just wiped out some book entries.

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Before, we had asset for corporation,

10:38

a CD,

10:42

reliability for the bank, a deposit in the form of a CD,

10:44

asset for the bank, a treasury bill.

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Now, by this process that I've just described,

10:51

we've wiped out two of those book entries.

10:54

We have asset for the corporation, a treasure bill,

10:56

the bank has neither an asset nor a liability,

11:00

corresponding to it.

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That's why it's called disintermediation,

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because you've gotten rid of the intermediary.

11:05

Well, the question, then..

11:07

Well, now as I say, that isn't what's literally happened,

11:09

because the assets

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which the bank acquired

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with the funds they got from CDs

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are not precisely and identically the same

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as the assets which the corporation will acquire.

11:22

But you can see, that it's a very close parallel

11:26

to it, in the sense,

11:30

that you have a very fluid capital market

11:32

that funds can flow back and forth from

11:34

commercial paper to other kinds of asset.

11:36

And so, in affect, what you've done

11:40

is to reduce the role of the banks in borrowing from some

11:42

and lending from the others.

11:45

And instead, you've increased the role of the corporations

11:46

in doing the direct lending.

11:50

Now, the question is, "Is this contractionary?"

11:52

If we look at this kind of a run off,

11:55

of the time deposits as a result of the CDs,

11:58

is this contractionary or expansionary?

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If you look only at the money supply

12:03

you'll say, well this is contractionary.

12:04

If you look through this process at the disintermediation,

12:07

it's very hard to know if it's contractionary at all.

12:10

What you can then say, is only, one aspect of it is,

12:13

that the banks, if anything, have greater free funds

12:18

because they now have released the reserves

12:22

which formerly had to be held against the CDs.

12:25

On the other side of the picture, you could say,

12:29

so far as the corporations are concerned,

12:31

they're just as well off as they were before.

12:33

That's one way of looking at it.

12:36

It's not the whole way, and it's not necessarily

12:37

the right way; it's much more complicated.

12:39

Presumably, the reason corporations held CDs before

12:42

rather than these other instruments,

12:45

is because they regarded the CD as a superior instrument.

12:47

They regarded it as more liquid,

12:52

otherwise they wouldn't have held it before.

12:54

And therefore, when they have to go directly

12:57

into the business of the loans, as it were,

12:59

the treasury bills, they are making themselves

13:01

a little bit less liquid.

13:03

And they will, as a result,

13:04

want to have higher demand deposits.

13:06

This is why people will talk about

13:10

the fact that you've had a shift

13:13

from time deposits into demand deposits.

13:14

Well, in a sense, that's right.

13:17

In part, you have.

13:19

The right way to look at it is,

13:20

disintermediation has led to an increased demand

13:22

on the part of the business enterprises

13:26

for demand deposits and therefore,

13:30

an increase in demand deposits would not be expansionary,

13:33

but would not really satisfy their desires.

13:36

On the whole, because of the fact

13:39

that CDs are a recent phenomenon.

13:42

We only have five or six years of experience with them,

13:44

we really have no empirical evidence, unfortunately,

13:46

to know how big is the secondary effect.

13:49

Whether it's big enough, so that, really,

13:53

you have to regard this run off in CDs as deflationary

13:56

or whether it is small enough so you can say,

13:59

"Well, we really ought to look, not at the total M2 in total

14:02

but an M2 minus CD."

14:05

I should say on this going, all the empirical studies

14:08

in the past, which has led me to regard M2

14:11

as a superior indicator of economic policy than M1,

14:13

those have all been for periods

14:18

when you didn't have any CDs.

14:19

So, that evidence isn't relative

14:21

to the handling of these large CDs,

14:23

which is a new innovation.

14:24

And my own personal feeling, at the moment,

14:25

is that there is a very strong APRI

14:27

reason to believe,

14:32

that this disintermediation is not a very important factor.

14:34

That it doesn't really matter if it is the banks

14:37

or the corporations that hold treasury bills

14:38

and commercial paper.

14:42

And then, consequently, in some ways,

14:44

you would get a better bit of evidence

14:46

on the behavior of money, if you look,

14:49

not at current M2, but at M2 minus these CDs.

14:50

Now, if you do that, you get back to the M1.

14:54

Because M2 minus the CDs has been behaving just like M1.

14:57

It's been roughly horizontal.

15:00

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I see.

15:02

You've been telling us to watch the money supply

15:03

and I was wondering, as you were talking,

15:07

if this different behavior

15:10

of different types of money supply,

15:14

different types of money,

15:16

constituted a challenge of any sort

15:18

of what you've been telling us to do.

15:20

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Oh, of course, it does, and it would.

15:22

My answer, to that particular question,

15:25

is that these differences in behavior

15:29

reflect entirely, regulation Q and

15:32

government intervention world has no business intervening.

15:37

In fifty years of data,

15:39

before the past few years,

15:44

you, at no time, have such wide discrepancies

15:45

between the movements of different monetary totals

15:48

as you have in the last five years.

15:51

Why?

15:53

Because, while regulation Q, or its equivalent,

15:54

was introduced in the middle '30s.

15:57

I've forgotten exactly which banking act.

15:59

It never was effective.

16:03

The limits were so high that it made no difference.

16:04

As a result, you didn't have this regulation Q effect.

16:07

Now, since the regulation Q has been biding,

16:09

every time you hit the regulation Q going up

16:12

M2 is now defined,

16:15

shows a sharp tapering off,

16:17

by comparison with M1 and M1 either rises more rapidly

16:20

or doesn't fall as much.

16:25

On the other hand, every time interest rates fall

16:26

and you come through the ceiling the other way,

16:29

you have this reversed.

16:31

So that most of this noise in the system

16:32

is being produced by the government policy,

16:34

affixing regulation Q.

16:37

You have no business fixing interest rates any way.

16:39

Why should the government be fixing prices?

16:41

And the answer to that question is,

16:43

that in order to have any kind of sensible monitoring policy

16:45

at all, by any criteria, we're gonna have to eliminate

16:48

regulation Q.

16:50

Now let's go back, for a moment, to the...

16:52

to these...diverse..

16:56

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Alright, yes.

16:58

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Because the next question I discussed,

16:59

and, too, now I want to talk about M1.

17:02

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Alright.

17:05

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Because the next parcel,

17:06

here is one of the monetary bases expanding

17:08

at a very rapid rate.

17:10

But M1 has been horizontal.

17:12

How come?

17:14

Who's been leading up that monetary base?

17:14

Have the banks been accumulating excess reserves?

17:17

No, if you look at the figures on excess reserves

17:20

they have large barter (mumbles).

17:22

They haven't been accumulating excess reserves.

17:24

Where has that base been going?

17:25

Well, the answer turns out to be another technical feature

17:27

of statistics and another...

17:29

Not something to do with the private market,

17:34

but due to government incompetence.

17:36

Pardon me for using such a strong word, currently.

17:39

It had to do with the treasury,

17:42

building up enormous treasury balances

17:44

in the past few weeks.

17:47

The treasury has been building up these balances

17:48

at a very rapid rate.

17:51

They are now extremely high and this is a result

17:53

of some of the

17:56

debt operations there.

17:58

They have been...I don't know the exact details

18:00

but I suppose they've been issuing debt

18:03

in order to accumulate funds for later expenditures

18:04

or for securities that are due to come due

18:07

and that they expect to run off or an attrition on them.

18:11

At any rate, treasury balances have been going up

18:13

very rapidly and the base has been absorbed

18:16

and providing banks with the reserves

18:18

behind these treasury balances.

18:21

However, when we calculate M1, quite properly,

18:23

you do not include treasury balances.

18:28

You include only the money held by the public at large.

18:30

The reason for that is partly, that we're really interested

18:34

in looking at M1 and what the public holds,

18:36

not what the government holds,

18:39

but the main reason is a different one.

18:40

And that is, that the total amount of treasury balances

18:42

both at the fed and at the commercial banks

18:44

is a purely bookkeeping numbering can be made

18:47

anything you want.

18:49

Tomorrow morning, if a fed and the treasury desired

18:50

they could jointly write an entry in the book

18:54

that the fed had 20 billion dollars worth

18:56

of treasury balances, at the fed.

18:58

It would just involve, there are some technical

19:00

legal difficulties about the debt ceiling and so on,

19:03

but I'm trying to...

19:06

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Yes.

19:07

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What could happen is that the treasury

19:08

writes one piece of paper, "I owe you 20 billion dollars"

19:09

and the fed gives him another piece of paper saying,

19:11

"I owe you 20 billion dollars"

19:13

and so you show up as a high treasury balance.

19:15

And treasury balances are purely bookkeeping phenomenon

19:18

in the reserve.

19:21

What is important about treasury balance

19:23

is when they are transferred back and forth

19:25

from commercial banks to the federal reserve.

19:27

Well, this build up in treasury balances

19:30

is largely what has been observing the base

19:32

and it is what accounts for the fact

19:35

that M1 has been moving horizontally

19:38

whereas the base has been rising at a very rapid,

19:42

indeed, a more rapid pace than earlier.

19:45

Now, the next question is, "What does this mean?

19:48

What is the implication of this?

19:52

What lessons do we ascribe from this?

19:53

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Exactly.

19:55

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Well, the first thing is

19:56

so far as the current monetary situation is concerned,

19:59

so far as current availability of money is concerned,

20:03

there's no doubt these figures mean it's tight.

20:07

Because from that point of view,

20:11

we want to look at what people actually hold.

20:13

And whether you look at M1 or look at M2

20:15

you have a

20:19

clear decline in the rate of growth

20:22

of the total money supply held.

20:25

That shows up as a much less extreme movement

20:28

in M1 than it does in M2, and from this point of view,

20:30

probably in this period, M1 is a better indicator,

20:33

because of the CD effect.

20:36

But the...

20:39

And I may say, in my opinion,

20:43

it is this current tightness.

20:44

The fact that there is this real tightness right now

20:46

that's showing up in the stock market.

20:49

It explains why you have a

20:50

a decline shock, in the stock market,

20:53

because we have much experience that the impact

20:55

of tightness or ease of money, in this sense,

20:58

shows up much more rapidly on financial markets

21:01

and understandably so, than it does on income

21:04

on the flow of payment of goods and services.

21:06

It can show up right away on financial markets

21:09

because as all things do,

21:11

because you're buying and selling existing stocks

21:12

and prices can move rapidly.

21:15

Whereas it takes time before it affects

21:17

how much people are going to spend

21:19

before these decisions about spending

21:20

are translated into actual expenditures and so on.

21:22

And that's why, historically, as I've indicated before,

21:24

changes in monetary, the rate of change of the money supply

21:28

have preceded changes in the stock market

21:31

by a much briefer interval than they have preceded

21:33

changes in the economy at large.

21:36

My...

21:38

as I say, going back,

21:40

as a description, you have to say

21:42

that the present situation is tight

21:44

but now the whole question always is,

21:45

is this tightness temporary or is it going to last?

21:46

Can I predict that the M1 will continue to go horizontal?

21:49

Can I predict the M2 will continue to go down?

21:53

Because so far, this is only left

21:55

at something like three, four, five, six weeks,

21:58

depending on what predictor measure you look at.

22:00

Now, we know from experience that so far

22:03

the effect on the economy as a whole is concerned,

22:05

the economy as a whole is capable of averaging out

22:08

these disturbances.

22:12

If I have the money supply going in 0% for one month

22:13

at, let's say 10% for the second month,

22:17

that's not going to have much different,

22:21

it's gonna be a little worse,

22:23

but not much different than having going up steadily

22:24

at 5% for those two months.

22:27

Of course, if I extend that,

22:28

if I have zero for six months and then 10% six months,

22:30

then I'm really gonna introduce bigger rations,

22:33

but the, since these effects are spread out

22:35

over a long period of time,

22:39

the economic system is pretty good,

22:40

pretty good at adjusting itself

22:43

to the legalities of governmental policies

22:45

and these... shocks.

22:47

-

What can you predict at this way?

22:51

-

Well, you see, that's what's really interesting then,

22:53

because therefore, as you say,

22:55

what can you predict about the money supply

22:58

because if this turns out to be a temporary change,

23:00

well, then, you've...

23:03

Then that will mean the market again will turn around

23:05

and get soft on it, but more importantly,

23:08

the economy doesn't have any negative implications

23:09

for the economy.

23:12

Well, now we look at the base.

23:13

The base has been going up very rapidly

23:16

and that means that commercial banks have reserves

23:18

available with which if the treasury runs down

23:22

its deposits, they can can turn them into private deposits.

23:26

And it looks very much, from past experience

23:30

what's happened is the treasury has been very erratic

23:33

in these movements in its deposits.

23:36

When its deposits has, have built up very high,

23:38

as they have in the past few weeks,

23:40

in the next few weeks they tend to run them down very much.

23:43

So, just for that technical feature

23:46

it looks very much as if the..

23:48

Vat fact will tend to make for a rapid expansion in M1.

23:53

The question then comes, "In order to prevent

23:56

that rapid expansion the fed would have to change

23:58

drastically the policy it's followed

24:01

with respect to the base.

24:03

That is to say, if the fed were to continue

24:04

expanding the base of its present rate of 8%

24:08

then you can be almost sure that the next month

24:12

is going to see just as sharp a reversal

24:14

in the behavior of M1 as the last two months

24:17

of the other way.

24:20

In that case, the picture looks like one of continued

24:22

rapid expansion in the relevant monetary totals.

24:26

What the picture confuse now, at that state,

24:30

only by a continued CD affect,

24:33

which will continue to produce or run-off in timed deposits.

24:36

Under those circumstances,

24:40

the implication would be that the weakness

24:42

in the financial markets is very likely to turn out

24:45

to be temporary when this additional money

24:47

floods into the system.

24:49

And then so far, as the economy is concerned,

24:51

you still will not have taken any effective steps

24:54

to taper off the economy.

24:57

Now, as I've indicated over and over again,

25:00

the danger, you're between a,

25:02

you're between two poles, given the way

25:04

the fed reserve system now operates.

25:07

Given the way it operates,

25:09

given the additional difficulties imposed by the CD thing.

25:11

On the one hand, you're always faced with the danger

25:15

that the fed will overreact;

25:17

step too sharply on the brakes.

25:19

And behave as it did, let's say, in '66.

25:21

And I may say, my own view on this

25:24

has been changing after looking over these figures

25:26

more carefully.

25:29

Because, I had been looking at M1 and M2.

25:30

And had just about come to the conclusion

25:33

that the fed was sharply overreacting

25:35

when some other students of this called my attention

25:38

to what was happening to the base and treasury deposits.

25:40

And once you introduce those,

25:43

I have been led to downgrade my own estimate

25:45

as the face of the likelihood that the fed

25:49

was gonna, at this stage, sooner or later,

25:52

it'll do it.

25:54

It's behaved in the past like this,

25:54

but the fed at this state was really stepping

25:56

too hard on the brakes.

25:58

So I would say, if you ask me,

26:00

"What are the overall implications of this

26:01

at the moment?"

26:03

They sum up to say

26:05

monetary supply as of today is very tight.

26:07

But there looks like a very, very high chance

26:12

that this is a temporary phenomenon.

26:16

That it's going to sharply be succeeded

26:19

by a very rapid expansion of the money supply

26:21

in which case, we are still in the problem

26:25

of having no, not only,

26:26

no overdoing of the anti-inflationary measures,

26:29

but no effective measures whatsoever

26:32

to hold down the

26:34

inflationary movement that has been going on

26:39

and has been continuing at a rapid pace.

26:41

-

Doctor, we're at this point now,

26:43

now what do we watch in order to try to detect

26:45

changes and direction?

26:49

-

Well, we have to keep on watching the things

26:51

I've really been talking about, I believe,

26:53

if, in fact, they...

26:56

What I've said about treasury balances

26:58

turns out to be right.

27:00

If treasury balances run off very sharply,

27:01

then that will show up fairly quickly

27:03

in a very rapid rate of expansion of M1,

27:06

of currency and demand deposits.

27:09

Next, we want to continue to look at the base.

27:13

Because if the base continues to go up

27:16

at it's present rate, that will obviously mean

27:18

that the where-with-all that's being provided

27:22

to the banking system, to the commercial banks,

27:25

with which to support a higher volume of

27:28

deposits.

27:33

So, what, as observers of the outside,

27:34

we ought to be looking at, are these figures in M2 and M1

27:36

and base, and interpreting them along the lines

27:39

that I've suggested in this case.

27:42

What the government ought to be doing

27:44

is one the one hand, moving to abolish regulation Q

27:46

and its disturbance, and on the other hand,

27:49

asking the treasury, for goodness sakes,

27:51

to stop this

27:53

whip-saw process of building up large deposits,

27:57

running down large deposits,

28:00

and building them up again.

28:01

-

Thank you very much, Dr. Freedman.

28:03

If you have questions or comments or suggestions

28:05

for topics you would like discussed in this series

28:09

please send them to Instructional Dynamics Incorporated.

28:12

166 East Superior Street

28:16

Chicago, 60611.

28:19

This is William Clark.

28:21

Dr. Freedman and I will be talking with you again next week.

28:23

Tape 16 - Divergent Monetary Trends

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