Tape 117 - Yugoslavia, International Monetary Development
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| - | Hello, this is William Clark of the Chicago Tribune, | 0:02 |
| welcoming again on behalf of | 0:04 | |
| Instructional Dynamics Incorporated, | 0:06 | |
| to a visit with the eminent economist, | 0:09 | |
| Professor Milton Friedman of the University of Chicago. | 0:12 | |
| We're recording this interview on Wednesday, | 0:15 | |
| March 14th, 1973. | 0:17 | |
| And Milton you haven't been in Chicago too long this time | 0:20 | |
| and you're on the verge of another trip, | 0:23 | |
| this time to Yugoslavia. | 0:25 | |
| Wonder if you could tell us a little bit about it? | 0:26 | |
| - | Well I'm going off to Yugoslavia at the invitation | 0:29 |
| of the Central Bank of Yugoslavia | 0:32 | |
| and the Institute of Investment of Yugoslavia and so on. | 0:35 | |
| And I discovered that when I tell people I'm going | 0:38 | |
| to Yugoslavia, there's sort of a surprised reaction, | 0:41 | |
| what a communist country. | 0:44 | |
| The fascinating thing to me is that Yugoslavia | 0:46 | |
| in my opinion, | 0:49 | |
| is one of the most fascinating places in the world | 0:50 | |
| because far from being the orthodox idea | 0:52 | |
| of a communist country, | 0:56 | |
| I think it's more accurately described as a place | 0:57 | |
| with creeping capitalism. | 1:00 | |
| There's a enormous amount of free enterprise. | 1:02 | |
| There's an enormous amount of competition. | 1:05 | |
| This all derives back from the fact | 1:08 | |
| that the various so called republics of Yugoslavia, | 1:11 | |
| Serbia, Croatia, Slovenia, Montenegro and so on, | 1:17 | |
| have a great deal of national feeling and the union of them | 1:22 | |
| is a very loosely held union. | 1:26 | |
| Indeed, if one wants to get an analogy | 1:28 | |
| to the present position of Yugoslavia, | 1:31 | |
| it's more like the Articles of The Confederacy | 1:33 | |
| in the United States before 1887, | 1:36 | |
| when you had the loose league, | 1:40 | |
| or confederation of the states, | 1:43 | |
| than it is like anything else. | 1:46 | |
| The only thing that really ties it together | 1:47 | |
| is the Central Communist Party. | 1:50 | |
| But some years back, | 1:52 | |
| well now close to 15 years back, after initially, | 1:55 | |
| immediately after the war proceeding along the Russian line | 2:00 | |
| a very detailed and controlled central planning, | 2:02 | |
| that was such a failure. | 2:06 | |
| Moreover, you will recall the political difficulties | 2:09 | |
| between Tito and the Russians. | 2:15 | |
| - | Yes. | 2:18 |
| - | And Tito wanted to declare his independence | 2:19 |
| from the Russians | 2:20 | |
| and one of the ways in which he declared his independence | 2:21 | |
| was by abolishing this central control. | 2:23 | |
| In any event, | 2:27 | |
| what you can do in that kind of thing does depend | 2:28 | |
| on the character and temper of the people, | 2:31 | |
| the Russian people. | 2:34 | |
| I've been very much impressed that you cannot really judge | 2:35 | |
| what is possible in a society or a country | 2:39 | |
| simply by the name of the political system. | 2:41 | |
| The Russian people under czarist regimes going back | 2:44 | |
| as far as man can remember, | 2:49 | |
| were accustomed to a highly centralized, | 2:52 | |
| highly dictatorial, highly controlled society | 2:55 | |
| and they naturally continued that under communism. | 2:57 | |
| Russian communism is partly communism | 3:00 | |
| and partly it reflects the characteristics | 3:03 | |
| of the Russian people, | 3:05 | |
| and they stand willingly. | 3:07 | |
| But we've seen for example in a country like Czechoslovakia, | 3:09 | |
| where you had communist leadership, | 3:13 | |
| yet it doesn't fit in too well with the temper of the people | 3:15 | |
| and they tried to change it. | 3:17 | |
| I'm not saying that the alternative is a good thing. | 3:19 | |
| On the contrary I think communism in general is a very, | 3:22 | |
| is a very unfortunate system. | 3:26 | |
| In Yugoslavia, you have a people in the various republics | 3:29 | |
| who on the one hand are a very independent kind of people, | 3:35 | |
| and on the other hand, | 3:39 | |
| do have these local pride. | 3:42 | |
| This local feeling of, | 3:44 | |
| an individual feels that he's a Crote, or a Slovene, | 3:48 | |
| he's not a Yugoslav first. | 3:52 | |
| - | I see. | 3:54 |
| - | He's a Crote and a Yugoslav second. | 3:55 |
| And as a result, | 3:58 | |
| once Tito opened the gates | 4:01 | |
| and eliminated the central planning, | 4:03 | |
| you have had an increasing degree of decentralization | 4:06 | |
| and of competition. | 4:10 | |
| Now the competition isn't exactly the same as it is here. | 4:13 | |
| The basic unit of enterprise is a corporation like ours, | 4:16 | |
| but it's a special kind of corporation in which | 4:21 | |
| all the stock is owned by the people who are employed by it, | 4:23 | |
| the employees etc., | 4:26 | |
| so called workers cooperative or employers productive unit. | 4:28 | |
| But yet, if you examine it from an economic point of view | 4:31 | |
| it has every feature similar to our corporation including | 4:35 | |
| the ability to compete freely on the open market | 4:42 | |
| with other similar corporations in buying and selling goods. | 4:45 | |
| That's why I've been fascinated by Yugoslavia, | 4:49 | |
| I spent a couple of months there about 10 years ago | 4:51 | |
| studying their monetary system | 4:54 | |
| and came to the conclusion much to my surprise, | 4:56 | |
| that the monetary relations in Yugoslavia were identical | 4:59 | |
| with the monetary relations in the U.S. or in Greece | 5:02 | |
| or in Japan, that they were very much the same. | 5:06 | |
| And I've been back once or twice since, | 5:09 | |
| I may say the particular occasion from my going back | 5:11 | |
| this time will surprise you a little bit, | 5:14 | |
| but the Yugoslav's have translated into Serbo Croatian | 5:17 | |
| a collection of my essays, | 5:21 | |
| various of my essays in money. | 5:23 | |
| It sounds strange to say, | 5:26 | |
| but I have some monetarist disciples in Yugoslavia. | 5:28 | |
| - | Wonderful. | 5:32 |
| - | And they do use again, | 5:33 |
| given the decentralized character of the system, | 5:35 | |
| control over monetary policy is a very important part | 5:38 | |
| of their policy. | 5:41 | |
| I have not followed in great detail what has happened | 5:45 | |
| there in the last three or four years, | 5:48 | |
| but I am looking forward very much | 5:50 | |
| to renewing my understanding of it | 5:52 | |
| in the two weeks that we're going to be over there. | 5:54 | |
| - | Well we'll look forward to the report | 5:56 |
| on your return certainly. | 5:58 | |
| Now you will be gone how long? | 5:59 | |
| - | We'll be gone altogether about four weeks | 6:00 |
| after the session in Yugoslavia, | 6:02 | |
| I'm going to a meeting | 6:05 | |
| that's being held in a pleasant place, | 6:06 | |
| all meetings are held in pleasant places, | 6:08 | |
| namely in Venice. | 6:10 | |
| Then after that we'll be back here. | 6:12 | |
| - | So for the information of our subscribers, | 6:14 |
| you will be missing one tape | 6:17 | |
| where it will be about a four week interval I judge? | 6:19 | |
| - | That's right I expect the next tape will be four weeks | 6:21 |
| from now instead of two weeks from now. | 6:24 | |
| - | Now I know your subscribers will expect you to comment | 6:27 |
| again on the international, | 6:30 | |
| what the Wall Street Journal referred to it | 6:32 | |
| this morning I think | 6:33 | |
| as the continuing international monetary muddle. | 6:34 | |
| We've had lots of new terms thrown at us laymen anyway, | 6:39 | |
| clean floats and dirty floats and so forth | 6:43 | |
| and reports of incidence of U.S. intervention, | 6:46 | |
| which you're not too happy about. | 6:49 | |
| Would you bring us up to date? | 6:51 | |
| - | Well it's very hard to bring anybody up to date | 6:52 |
| because all I know is what you know, | 6:55 | |
| is what we read in the newspapers. | 6:59 | |
| The bare outlines are clear but some of the details are not. | 7:01 | |
| Now the bare outlines of course are, | 7:05 | |
| that you are going to have a joint float | 7:07 | |
| by six European countries. | 7:11 | |
| Germany, France, Benelux, and Denmark. | 7:15 | |
| What does a joint float mean? | 7:21 | |
| It means that with respect to the exchange rates | 7:24 | |
| between those countries, | 7:27 | |
| between Germany and France, between Germany and Belgium, | 7:29 | |
| between Denmark and Germany, | 7:32 | |
| an attempt will be made to hold those cross-exchange rates | 7:36 | |
| within two and a quarter percent band, | 7:40 | |
| that is to say they will not be permitted to rise | 7:43 | |
| more than, I think, | 7:46 | |
| the newspaper reports are very unclear whether it's | 7:49 | |
| two and a quarter on each side | 7:52 | |
| or a total band of two and a quarter. | 7:54 | |
| Whichever it is, | 7:56 | |
| there is a band within which they will move. | 7:57 | |
| However, the whole collection of rates, | 8:00 | |
| will rise or fall visa vie the U.S. dollar, | 8:04 | |
| in a float of the same kind that the Canadian dollar | 8:09 | |
| has been engaged in, | 8:12 | |
| that the British pound has been engaged in | 8:13 | |
| and so on, period. | 8:15 | |
| One question is how well the rates be kept | 8:18 | |
| within their limits internally among the six. | 8:22 | |
| There's only one way in which that can be done, | 8:25 | |
| and that is by the separate countries being willing | 8:28 | |
| to buy one another's currencies and peg it. | 8:30 | |
| The business of pegging exchange rates is | 8:33 | |
| no different from the business of pegging | 8:35 | |
| the price of wheat or the price of silver | 8:37 | |
| or the price of shoes | 8:39 | |
| or anything else. | 8:40 | |
| This can be pegged only if Germany | 8:42 | |
| will be willing for example to buy francs or Danish krona | 8:45 | |
| or other currencies within the group of six. | 8:51 | |
| Whenever their price tends to fall too low | 8:56 | |
| relative to the German mark, | 8:59 | |
| and if those countries will be willing to buy | 9:01 | |
| German currency whenever the price of German currency | 9:04 | |
| were to fall too low relative to those currencies. | 9:08 | |
| The problem is no different than the problem | 9:12 | |
| that the world as a whole has been having under the system | 9:15 | |
| of Bretton Woods fixed exchange rates. | 9:17 | |
| When you had a supposed link among all of the currencies, | 9:20 | |
| and again the only way in which | 9:26 | |
| that link could be maintained would be by | 9:27 | |
| the separate countries being willing | 9:29 | |
| to buy one another's currencies | 9:31 | |
| when you reached these limits. | 9:33 | |
| It's a little easier of course | 9:39 | |
| for these six countries to do it | 9:41 | |
| than it was for all the many countries of the world | 9:42 | |
| because presumably these six are closely linked | 9:44 | |
| economically, they're closely linked politically, | 9:47 | |
| they're closely linked in trade and therefore, | 9:50 | |
| there is some reason to expect | 9:53 | |
| that the internal economic developments within them | 9:55 | |
| proceed in much the same direction and hence they are, | 10:01 | |
| their exchange rates will not move too much. | 10:05 | |
| But even so, | 10:07 | |
| my guess is that this arrangement will not last very long. | 10:09 | |
| It must not be supposed that this is a new thing. | 10:13 | |
| It's been tried in the European context | 10:16 | |
| several times before. | 10:19 | |
| You've all heard the phrase of snake in the tunnel. | 10:20 | |
| Well this is a snake in the tunnel. | 10:24 | |
| The snake in the tunnel was an arrangement under which, | 10:26 | |
| the European countries were supposed to keep the cross rates | 10:29 | |
| between themselves within a narrower range | 10:33 | |
| than they were gonna keep their rates | 10:36 | |
| visa vie the U.S. dollar. | 10:37 | |
| They were going to move within a plus | 10:40 | |
| and minus two and a quarter percent | 10:42 | |
| instead of four and a half percent range. | 10:43 | |
| That broke down, | 10:46 | |
| the only difference between the present arrangement | 10:48 | |
| and the snake in the tunnel, | 10:49 | |
| is that in the early arrangement the tunnel was fixed | 10:51 | |
| and now the tunnel is moving. | 10:54 | |
| You've got the tunnel moving up and down | 10:56 | |
| with the floating rate | 10:58 | |
| and now you've got the snake moving up and down | 11:00 | |
| within the tunnel, that is a narrower. | 11:02 | |
| And just as a snake in the tunnel broke down | 11:06 | |
| this one will break down. | 11:08 | |
| It will break down because most obvious source of breakdown, | 11:09 | |
| I don't mean to be predicting it, | 11:15 | |
| but the most obvious source is between France and Germany. | 11:16 | |
| Just consider for the moment the fact that France | 11:20 | |
| has just come through an election, | 11:22 | |
| in which the ruling parties, | 11:24 | |
| the Gaullist Party's had a drastically reduced lead. | 11:25 | |
| They will respond to the public opinion, | 11:29 | |
| that public opinion is going to call upon | 11:31 | |
| the Gaullet government to engage in a greater degree | 11:34 | |
| of spending of demand for rise in the minimum wage, | 11:37 | |
| other measures. | 11:44 | |
| It is certainly very highly likely, | 11:46 | |
| that that will produce within France, | 11:48 | |
| a greater degree of inflation | 11:50 | |
| than would otherwise come about. | 11:52 | |
| If Germany does not want to follow that inflation, | 11:54 | |
| if it wants to hold it's inflation down, | 11:56 | |
| the result of this will be to put the French franc | 11:59 | |
| and the German mark out of alignment. | 12:02 | |
| And once that happens, | 12:05 | |
| the question is, | 12:06 | |
| will Germany be willing indefinitely to subsidize France | 12:07 | |
| by buying French francs to keep them from depreciating. | 12:12 | |
| Germany started out by appreciating her currency | 12:16 | |
| three percent visa vie the franc. | 12:21 | |
| This was already an initial recognition | 12:23 | |
| that there was going to be a problem | 12:26 | |
| that the German mark was going to be strong | 12:27 | |
| visa vie the franc. | 12:32 | |
| So I think this will break down. | 12:34 | |
| - | Then what? | 12:37 |
| - | Then you will move in the direction | 12:38 |
| that you've moved elsewhere, | 12:40 | |
| you'd move toward the individual country floats, | 12:41 | |
| just as you have Britain floating independently | 12:44 | |
| from Germany. | 12:46 | |
| You see Germany wanted a joint float which would include | 12:48 | |
| Britain, Italy and Ireland. | 12:52 | |
| But Britain and Italy were unwilling to go along. | 12:55 | |
| So they settled for this float. | 12:58 | |
| Why did Germany want this instead of | 13:00 | |
| just floating individually? | 13:02 | |
| Well as I think I said in the last tape, | 13:03 | |
| the only explanation I can give is a purely political one | 13:05 | |
| that Helmut Schmidt was going to demonstrate | 13:09 | |
| that he was different from Schiller whom he had replaced. | 13:11 | |
| And he had announced he wasn't gonna float Germany alone, | 13:14 | |
| he wasn't gonna appreciate Germany. | 13:17 | |
| He did appreciate the German mark via our devaluation, | 13:19 | |
| which de covered him. | 13:23 | |
| He now is floating via the joint float, | 13:25 | |
| which again gives him a way out. | 13:29 | |
| I see no other reason. | 13:30 | |
| If I were a German I would certainly not be interested | 13:31 | |
| in this arrangement. | 13:34 | |
| I think it's a very bad arrangement. | 13:35 | |
| So I think it will break down | 13:38 | |
| and it will break into separate country's floats. | 13:40 | |
| Now there are several things that need to be said about it. | 13:42 | |
| One thing is people will say, | 13:45 | |
| well all this floating you've got the yen floating, | 13:46 | |
| you've got the Swiss franc floating, | 13:51 | |
| you've got the British pound floating, | 13:52 | |
| one thing that is said about it, | 13:55 | |
| these are gonna be dirty floats. | 13:56 | |
| The government is gonna intervene to move around it, | 13:59 | |
| that's true. | 14:01 | |
| I would prefer clean floats. | 14:03 | |
| But my standard answer to this question is simply to say | 14:04 | |
| that I prefer a dirty float to a dirty fixed rate. | 14:08 | |
| And those are the only choices you've got. | 14:12 | |
| If you're gonna have a fixed rate it's gonna be dirty too. | 14:13 | |
| The second thing that is said, | 14:16 | |
| is that well now aren't, | 14:18 | |
| in the course of time won't the Swiss and the English | 14:20 | |
| and so on, | 14:23 | |
| attach themselves to the German mark. | 14:24 | |
| Is that not therefore going to make the German mark | 14:26 | |
| an alternative international currency | 14:29 | |
| that will replace the dollar? | 14:32 | |
| Another form of this same question | 14:34 | |
| and I wanna answer it altogether, | 14:36 | |
| is the widespread newspaper interpretation of what's goin on | 14:39 | |
| as a sign that the U.S dollar has lost it's status | 14:43 | |
| as an international currency | 14:47 | |
| and is being replaced by other currencies. | 14:49 | |
| I think both of these views are fundamentally wrong, | 14:52 | |
| and completely wrong. | 14:55 | |
| That is they are in one important respect, | 14:56 | |
| going in the opposite of the truth. | 14:59 | |
| The whole problem here is what you compare things with. | 15:03 | |
| If you go back to the period let's say before 1968, | 15:07 | |
| before the two-tier system, | 15:11 | |
| to the Bretton Woods system proper, | 15:13 | |
| under which the keystone of the system | 15:16 | |
| was a U.S. willingness to convert dollars into gold. | 15:18 | |
| There is a sense in which the U.S. has lost position | 15:22 | |
| as a key currency of the world. | 15:25 | |
| It was a key in that system to a greater extent | 15:27 | |
| than it is now. | 15:31 | |
| But if we go to the system that has in fact prevailed | 15:33 | |
| from 1968 to now, | 15:36 | |
| in which you had no fundamental gold length, | 15:39 | |
| certainly from 1971, August 1971 when that became apparent. | 15:44 | |
| If you go to that system, | 15:48 | |
| the dollar under those circumstances was linked by | 15:50 | |
| temporarily fixed exchange rates with the mark | 15:55 | |
| and with other currencies. | 15:57 | |
| Now, when we talk about an international currency | 15:59 | |
| we must mean very many different things. | 16:03 | |
| One important meaning of it is as a vehicle currency, | 16:05 | |
| what does that mean? | 16:09 | |
| Here is a person from Brazil who is making a deal | 16:10 | |
| with a person in Malaya. | 16:14 | |
| In the great bulk of cases he will make that deal | 16:17 | |
| neither in Brazilian currency nor in Malayan currency. | 16:19 | |
| The deal will be made in a third country currency. | 16:23 | |
| What currency? | 16:26 | |
| In the main it will be in terms of the dollar. | 16:30 | |
| That's the meaning of a vehicle currency, | 16:32 | |
| that the dollar is the currency in terms of which, | 16:34 | |
| countries other than the U.S. make transactions, | 16:38 | |
| specify their transactions, specify their contracts. | 16:42 | |
| Now you also have the notion of a currency | 16:46 | |
| as an intervention currency. | 16:50 | |
| Now this is something else, | 16:53 | |
| if we go back to the period of a fixed exchange rate, | 16:54 | |
| you had, let us say Germany or other countries, | 16:59 | |
| with central banks, trying to maintain their exchange rates | 17:02 | |
| between limits, definite limits, | 17:06 | |
| and the question is, | 17:08 | |
| how did they intervene in the market to keep them within | 17:10 | |
| those limits? | 17:12 | |
| Let me make the case clear, | 17:14 | |
| the Germans find under that system and consider it right, | 17:16 | |
| this will be true under the common market as well, | 17:22 | |
| under the present joint float, | 17:25 | |
| the rate between the German mark and the French franc | 17:28 | |
| is going out of order. | 17:31 | |
| Now how does the German Central Bank intervene? | 17:34 | |
| It might intervene by using francs, | 17:37 | |
| to sell or buy francs. | 17:39 | |
| But the fact of the matter is that | 17:41 | |
| isn't the way it does it at all. | 17:42 | |
| It intervenes by buying francs for dollars | 17:44 | |
| or selling for dollars. | 17:46 | |
| It uses dollars as a currency in terms of which, | 17:48 | |
| it intervenes into the foreign exchange market | 17:51 | |
| because there's so much more fluid a market in dollars | 17:53 | |
| than there is in anything else. | 17:57 | |
| In the third place, | 17:58 | |
| you have the currency | 18:00 | |
| that is being used as a liquid reserve, | 18:01 | |
| as a store of assets. | 18:04 | |
| People wanna hold, | 18:06 | |
| people outside the United States, foreigners, | 18:08 | |
| people in foreign countries, | 18:10 | |
| the Arab sheiks are the favorite example, | 18:12 | |
| they wanna hold some funds in liquid form, | 18:14 | |
| not in their own currency, | 18:17 | |
| in what form do they hold them? | 18:19 | |
| Well here again in the main, | 18:21 | |
| the dollar has been the form in which they have held it. | 18:22 | |
| Now the question of whether the dollar has lost | 18:25 | |
| or gained ground as a international currency, | 18:27 | |
| is a question of what has happened to the extended use | 18:30 | |
| of the dollar in these three varied ways, | 18:34 | |
| as a result of the floating of rates. | 18:38 | |
| Now, with respect to a vehicle currency, | 18:41 | |
| the floating of rates increases I believe, | 18:44 | |
| will increase the use of the dollars, not decrease it. | 18:47 | |
| Let me explain why. | 18:49 | |
| So long as the dollar and the mark were linked | 18:52 | |
| by fixed rates, | 18:54 | |
| it made no difference to you whether | 18:56 | |
| you stated your contract in dollars or in marks. | 18:57 | |
| That was the same thing, | 19:00 | |
| you might as well say in dollars. | 19:01 | |
| But now they're not linked by fixed rates, | 19:03 | |
| now the mark may go up or down. | 19:04 | |
| Now you've got a choice, | 19:07 | |
| you haven't got a good choice. | 19:08 | |
| You either are going to state your contract | 19:10 | |
| in terms of the mark, | 19:12 | |
| which is subject to fluctuating in terms of the dollar, | 19:14 | |
| or you're gonna state it in terms of the dollar, | 19:16 | |
| which is subject to fluctuating in terms of the mark. | 19:18 | |
| Now given the fact that an enormously greater volume | 19:21 | |
| of world trade is conducted by the United States, | 19:25 | |
| and in dollar terms than is conducted by mark, Germans, | 19:29 | |
| given the fact that U.S banks | 19:32 | |
| have an enormous financial network all over the world, | 19:34 | |
| that wherever you are in the world | 19:37 | |
| there'll be a U.S. bank, | 19:38 | |
| while the German banking system | 19:40 | |
| is very much more limited internationally. | 19:41 | |
| I think you're going to opt in general for the dollar. | 19:44 | |
| That doesn't mean that there's nothing | 19:47 | |
| that could prevent you from doing that. | 19:49 | |
| If the U.S. were to undertake, | 19:51 | |
| were to follow very very destabilizing | 19:53 | |
| internal monetary policies, | 19:56 | |
| if we were to become a Latin American country | 19:57 | |
| and have inflation rates of 30, 35%, | 20:00 | |
| and then turn around and have it down back down to 5%, | 20:04 | |
| I have no doubt that people would stop using the dollar | 20:09 | |
| as an intervention currency. | 20:13 | |
| But you have to have a sense of proportion. | 20:15 | |
| When we talk about our domestic monetary policy | 20:18 | |
| and our policies, we get all upset and properly so, | 20:20 | |
| about the fact that the rate of inflation | 20:24 | |
| is seeming to pull up from 3% to 4%, | 20:26 | |
| that it was as high as six percent. | 20:29 | |
| But if you compare, that behavior with the behavior | 20:31 | |
| of almost any other currency in the world, | 20:34 | |
| including the German currency. | 20:36 | |
| It looks much better from an international point of view. | 20:38 | |
| Here is the British, see again, | 20:41 | |
| because of the enormous convenience | 20:45 | |
| of having a single currency in world trade, | 20:47 | |
| whatever may be the formal rules of the game, | 20:51 | |
| whatever may be the arrangements countries make, | 20:54 | |
| private people will tend to settle on one currency | 20:57 | |
| as the international vehicle currency. | 20:59 | |
| In the 19th century it was the British pound, | 21:02 | |
| and in the 19th century Britain had a fairly stable | 21:05 | |
| internal monetary policy visa vie other countries. | 21:08 | |
| Nobody would use a British pound today, | 21:12 | |
| when prices in Britain at the moment are rising at 10 or 12% | 21:15 | |
| when they've been fluctuating all over the lot | 21:20 | |
| when Britain is in a very unstable position | 21:21 | |
| with the widespread labor troubles and strikes. | 21:23 | |
| Germany is more attractive, | 21:29 | |
| the market is more attractive. | 21:30 | |
| The German economic policy has been more stable. | 21:32 | |
| But you know you'll be a little hesitant about that | 21:36 | |
| the opening to the East, | 21:38 | |
| the ost politique of Brandt opens up all sorts | 21:40 | |
| of possible dangers. | 21:44 | |
| If you ask yourself in this unstable, | 21:45 | |
| undesirable world from that point of view, | 21:48 | |
| which is the least bad place? | 21:51 | |
| You still have to come out with the U.S. | 21:53 | |
| There's no way of coming out with it. | 21:55 | |
| So as a vehicle currency, | 21:56 | |
| I believe the U.S. dollar is strengthened by this move | 21:59 | |
| to floating exchange rates not weakened because of the fact | 22:03 | |
| that now the mark and other currencies are no longer | 22:07 | |
| as close a substitute for the dollar as they were before. | 22:11 | |
| - | I see, understand. | 22:13 |
| - | Now when you come to these two other uses, | 22:14 |
| it's more comforting, as an intervention currency, | 22:16 | |
| the more floats there are the less need for intervention. | 22:19 | |
| But it will still be used as the intervention currency. | 22:22 | |
| As a holder of liquid assets, well that depends. | 22:25 | |
| If you have a free float, a reasonably free float, | 22:29 | |
| so that the currencies assume more nearly | 22:34 | |
| their appropriate mark and value visa vie one another, | 22:37 | |
| well then there will no longer be any great incentive | 22:42 | |
| to keep your holdings in marks | 22:45 | |
| and I think that there will be a great outflow | 22:46 | |
| from marks and back into the dollars. | 22:49 | |
| And I suspect the dollar will remain | 22:51 | |
| the major hoard for foreign countries. | 22:54 | |
| I'm not trying to say whether this is good or bad, | 22:59 | |
| there's not necessarily any, | 23:02 | |
| it's not a great advantage to the U.S. | 23:04 | |
| to have the dollar used this way, | 23:06 | |
| I'm just trying to describe the facts. | 23:07 | |
| - | Sure. | 23:09 |
| - | And I think those people therefore who have been saying | 23:10 |
| that the dollar has lost it's status | 23:12 | |
| as an international currency, | 23:14 | |
| are very far from the mark. | 23:16 | |
| - | Well Milton what do you think about this problem of | 23:18 |
| U.S. intervention in this? | 23:20 | |
| - | That is in many ways the most disturbing problem | 23:22 |
| of everything that has appeared in the paper. | 23:25 | |
| One of the problems is we don't know what the situation is. | 23:28 | |
| On the one hand, | 23:31 | |
| Secretary Schultz stated explicitly | 23:33 | |
| in his news conference last Friday, | 23:36 | |
| the the U.S. had entered into no commitment whatsoever | 23:39 | |
| to intervene. | 23:42 | |
| On the other hand, | 23:44 | |
| every day there is a planted leak by a European | 23:45 | |
| that once this thing gets established | 23:49 | |
| and the central banks get open next week, | 23:52 | |
| the U.S. has committed itself to intervene | 23:56 | |
| in a mild way to peg it. | 23:59 | |
| Now, I have much clearer | 24:02 | |
| and stronger feelings on the question of what we should do. | 24:05 | |
| It was reported just the other day | 24:10 | |
| that prior to February 12th when the devaluation took place, | 24:13 | |
| the Federal Reserve Bank | 24:17 | |
| had sold some 300 odd million dollars of marks, | 24:19 | |
| which it had borrowed in order to sell. | 24:23 | |
| I think that was a disgraceful thing to do. | 24:25 | |
| It was a wrong thing to do, | 24:29 | |
| and I use the word disgraceful literally. | 24:30 | |
| The U.S. did on a smaller scale, | 24:34 | |
| what Helmut Schmidt did on a larger scale for Germany. | 24:36 | |
| We sold 360 million dollars worth of marks, | 24:41 | |
| we had to buy those back at a higher price to repay them, | 24:45 | |
| the Federal Reserve I would say wasted, | 24:49 | |
| threw away something like 36 million dollars | 24:53 | |
| of your and my money in idle attempt to peg up the price | 24:57 | |
| of the dollar. | 25:03 | |
| I do not believe that the taxpayers of America really want | 25:04 | |
| to authorize the Federal Reserve to engage in speculation | 25:10 | |
| in exchange rates with our money. | 25:15 | |
| That 36 million dollars bought nothing | 25:18 | |
| and it was simply a waste. | 25:21 | |
| Now don't misunderstand me, | 25:24 | |
| I have no objection to speculation. | 25:27 | |
| I think private speculation is fun. | 25:29 | |
| I think those people who keep on talking | 25:31 | |
| about this all being a speculative affair | 25:33 | |
| are barking up the wrong tree. | 25:35 | |
| I think that we never would've had the kind of changes | 25:38 | |
| we've had in the exchange rate system | 25:41 | |
| all in a good direction | 25:43 | |
| if it hadn't been for private speculation, which forced it. | 25:44 | |
| But I don't want my government officials | 25:48 | |
| to speculate with my money, | 25:50 | |
| if anybody's gonna speculate I want them to speculate | 25:51 | |
| with his money not mine. | 25:53 | |
| And I think it is disgraceful, | 25:55 | |
| literally disgraceful for the Federal Reserve | 25:57 | |
| or the Treasury to engage in such speculation. | 25:59 | |
| I hope they will not do it in the future, | 26:02 | |
| but I have no great confidence since they have done it | 26:05 | |
| twice in the past, | 26:08 | |
| once a year ago on a small scale, | 26:09 | |
| once again recently on a small scale. | 26:11 | |
| There are all these rumors coming out from Europe | 26:14 | |
| and where there's smoke there's some fire, | 26:16 | |
| so I believe that you very well may be having a dispute | 26:18 | |
| within the U.S. government between the Treasury | 26:22 | |
| on the one hand and the Federal Reserve on the other | 26:25 | |
| with the Treasury wanting to keep clean out of it. | 26:27 | |
| The Federal Reserve wanted to get in | 26:30 | |
| and the State Department playing the role, | 26:31 | |
| the most important role | 26:33 | |
| because the State Department | 26:35 | |
| looks at political considerations | 26:36 | |
| and they say, | 26:38 | |
| "Oh my God we've gotta maintain good political relations, | 26:39 | |
| we've gotta cooperate with them," | 26:41 | |
| and one way to cooperate with them | 26:43 | |
| is to intervene in this way. | 26:45 | |
| Thank you very much Dr. Milton Friedman. | 26:48 | |
| - | Remember you subscribers if you have questions | 26:50 |
| to ask Dr. Friedman or subjects that you would like him | 26:52 | |
| to discuss, please send your suggestions to | 26:55 | |
| Instructional Dynamics Incorporated, | 26:57 | |
| 166 East Superior Street, Chicago, 60611. | 27:00 | |
| Dr. Friedman will be going to Yugoslavia for a trip now | 27:06 | |
| and he will be back with you in about four weeks. | 27:09 |
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