Tape 124 - The German Mark, Federal Reserve Action, Interest Rates, Subscribers Queries
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Rose | Hello, this is Rose Friedman, | 0:02 |
inviting you on behalf of Instructional Dynamics | 0:04 | |
to another of our bi-weekly interviews with Milton Friedman, | 0:07 | |
Professor of Economics at The University of Chicago. | 0:10 | |
We are taping this interview on Wednesday, July 4th, 1973. | 0:13 | |
There has been a flurry | 0:19 | |
in the German money market this past week. | 0:20 | |
Is this the beginning of another series of monetary crisis? | 0:23 | |
Milton | I believe not. | 0:27 |
I believe rather that this is the first sign of the breaking | 0:28 | |
up of the so called European snake on the river. | 0:32 | |
That is to say the agreement among six European countries | 0:37 | |
to maintain their own exchange rates | 0:42 | |
in a fixed relationship to one another. | 0:45 | |
The German government has revalued the mark, | 0:48 | |
but that is meaningless with respect to all | 0:52 | |
of the currencies with respect to | 0:54 | |
which the German mark was floating. | 0:56 | |
It's effective meaning is with respect to the franc | 0:58 | |
to the Benelux currencies and to the other currencies | 1:01 | |
with respect to which the German mark | 1:04 | |
had a fixed exchange rate. | 1:07 | |
As the listeners to these tapes know, | 1:09 | |
from the very beginning I have argued | 1:11 | |
that that agreement to fix the exchange rates | 1:13 | |
among the six was not like the last one. | 1:16 | |
This already it is now having to be restructured. | 1:19 | |
What happened was that at the fixed rates | 1:22 | |
among those currencies there was | 1:25 | |
a preference for the German mark. | 1:28 | |
In order to maintain those fixed rates, | 1:30 | |
Germany was having to accumulate | 1:32 | |
French francs, Belgian francs and so on. | 1:33 | |
Germany finally reacted to that the same way | 1:37 | |
it had reacted much earlier to the situation | 1:40 | |
when it was forced to accumulate American dollars. | 1:43 | |
It finally gave up, stopped purchasing those currencies, | 1:46 | |
revalued the mark by 5% | 1:50 | |
with respect to those other currencies. | 1:52 | |
So I would rather say that what's happened in Germany | 1:55 | |
is simply another illustration on a somewhat smaller scale | 1:57 | |
of the defects of fixed exchange rates. | 2:01 | |
I do not know what the outcome will be. | 2:04 | |
Temporarily, at least, the group of European countries | 2:06 | |
have patched up the agreement. | 2:11 | |
They are going to continue to try | 2:13 | |
to maintain a system of fixed exchange rates | 2:15 | |
but a new set of fixed exchange rates | 2:17 | |
with the German mark valued more highly. | 2:19 | |
It will run into trouble again. | 2:21 | |
Whether it will be in two months or six months, | 2:23 | |
it's hard to say, but I expect that, sooner or later, | 2:25 | |
we will have another flurry of this kind | 2:28 | |
which will lead either to more reevaluations | 2:31 | |
within that group of countries | 2:33 | |
or else to the establishment of floating rates | 2:36 | |
among them as well as between them, | 2:40 | |
the U.S. dollar, the British pound, | 2:43 | |
and other major, other currencies. | 2:46 | |
Rose | Has this had any effect on the dollar? | 2:48 |
Milton | Well obviously one effect is that the price | 2:51 |
of the dollar vis-a-vis the German mark had a change | 2:53 | |
by comparison with the price | 2:56 | |
of the dollar vis-a-vis the other currencies. | 2:57 | |
The cross-rates between the currencies have to stay orderly. | 3:00 | |
However and it is true that coincidentally | 3:04 | |
with the disturbance in the European markets, | 3:07 | |
the dollar did fall relative to the German mark, | 3:12 | |
as it had to, but also relative to the other currencies. | 3:15 | |
But I don't believe that that fall really had very much | 3:18 | |
to do with the flow into the German mark | 3:22 | |
because the movement into the German mark came out | 3:29 | |
of these other European currencies not out of the dollar's. | 3:32 | |
The reason why the U.S. dollar fell at the same time | 3:35 | |
I think is very easy to understand. | 3:38 | |
It was largely a reaction to the export restrictions | 3:41 | |
which Mr. Nixon imposed. | 3:44 | |
Mr. Nixon imposed restrictions on soybeans. | 3:46 | |
He imposed restrictions on other commodities, | 3:49 | |
and moreover, his action was a clear sign | 3:52 | |
of further restrictions to come. | 3:55 | |
Well now if you ask yourself | 3:57 | |
what a foreigner wants dollars for, | 3:59 | |
he wants dollars in order to buy American goods. | 4:00 | |
Every time we reduce the range of American goods | 4:03 | |
which he can buy with those dollars, | 4:06 | |
the value of those dollars to him goes down, | 4:08 | |
and thus, it is perfectly understandable | 4:10 | |
to be expected that export embargoes would produce | 4:13 | |
a decline in the value of the U.S. dollar | 4:17 | |
in terms of other currencies. | 4:19 | |
Rose | Still on money matters, the Federal Reserve | 4:21 |
has just increased the discount rate | 4:25 | |
and increased reserves as well. | 4:28 | |
What does this imply about the Federal Reserve policy | 4:30 | |
for the near future? | 4:33 | |
Milton | Well the first thing to point out is | 4:34 |
that the discount rate was very far below the market rates. | 4:37 | |
Short-term market rates had risen, well the most recent rise | 4:43 | |
has been the prime rate rise to 8%. | 4:49 | |
Treasury bill rates are a little bit less than that | 4:52 | |
but not far from that. | 4:55 | |
The federal funds rate, that is the rate | 4:57 | |
at which member banks borrow from one another, | 4:59 | |
had also gone up very sharply. | 5:02 | |
As a result, the Federal Reserve discount rate was | 5:05 | |
out of line with market rates | 5:08 | |
which of course established a strong incentive | 5:10 | |
for member banks to borrow as extensively as they could | 5:13 | |
at Federal Reserve Banks, and indeed borrowings | 5:16 | |
from Federal Reserve Banks have been | 5:18 | |
at an all-time high in recent weeks. | 5:20 | |
In consequence, the simplest interpretation | 5:24 | |
of the discount rate increase was that it was a reaction | 5:28 | |
to the Fed to what was happening in the market, | 5:30 | |
not an indication of some independent move | 5:32 | |
by the Fed to change what it was doing. | 5:35 | |
The interesting thing about this discount rate is | 5:39 | |
that it does bring the discount rates | 5:42 | |
to the highest level in Federal Reserve history. | 5:44 | |
Now in a way, that's not surprising. | 5:47 | |
Inflation is also at the highest level in Federal Reserve | 5:49 | |
history except only for the wartime episodes, | 5:52 | |
for the episode immediately after World War I | 5:55 | |
and for inflation during World War II and for inflation | 5:58 | |
during a brief period around the Korean War episode. | 6:02 | |
If we look at what has been happening, | 6:07 | |
more importantly, on the side of monetary growth, | 6:10 | |
the situation is that for the first few months of 1973, | 6:14 | |
the quantity of money was growing slowly, | 6:19 | |
but in the last two months, it has been going | 6:20 | |
at an incredibly high rate, something like 11.3% | 6:23 | |
for a two month period. | 6:26 | |
The latest figures do not show any slowdown | 6:28 | |
in that rate of growth. | 6:30 | |
They show a continued rate of growth. | 6:31 | |
I think the last figure is for the past two months | 6:33 | |
something like 12% for narrow money, money narrowly defined. | 6:35 | |
It is perfectly clear that these rates exceed substantially | 6:40 | |
the rates that the Fed is aiming at. | 6:44 | |
It is also clear that the Fed recognizes that it cannot, | 6:47 | |
for any long period, have its cake and eat it too. | 6:51 | |
It cannot have a monetary growth rate it wants | 6:54 | |
at the same time that it has interest rates | 6:57 | |
where it wants them, and so I believe that, unquestionably, | 6:59 | |
the Federal Reserve has reconciled a higher interest rate | 7:03 | |
and is trying to bring down the rate of monetary growth. | 7:07 | |
However, to say that they are trying to bring it down | 7:11 | |
does not mean that they will succeed | 7:14 | |
or does not mean how far they will succeed. | 7:15 | |
Again, as I repeatedly emphasized, I think the best basis | 7:18 | |
for us to judge is what their behavior | 7:22 | |
has been over the past several years, | 7:24 | |
and over the past several years, | 7:26 | |
what is important is that whenever monetary growth | 7:28 | |
has exceeded by substantial amounts | 7:30 | |
the levels they were aiming at, they have brought it back. | 7:33 | |
They have brought it back temporarily | 7:37 | |
to the level they were aiming at and then let it go again. | 7:39 | |
As a result of which, over any long period, | 7:41 | |
the rate of growth has averaged higher | 7:43 | |
than that which they were aiming at. | 7:45 | |
I believe right now they are aiming at something like 5%. | 7:47 | |
They are getting something over a five | 7:50 | |
or six month period of 7% or more. | 7:54 | |
I am reasonably confident that over the near future, | 7:57 | |
they will be bringing it back down to a lower level, | 8:01 | |
but I doubt very much that they will be getting it down | 8:03 | |
to something like 5% over the coming few months. | 8:06 | |
With respect to the change in reserve requirements, | 8:09 | |
it's worth emphasizing what role that plays. | 8:12 | |
What the Fed did was to increase the percentage of deposits | 8:15 | |
at the Federal Reserve in cash, of all in cash, | 8:21 | |
which member banks must hold | 8:24 | |
corresponding to their demand deposits. | 8:26 | |
It increased, I believe it was, | 8:28 | |
by one half of a percentage point that reserve requirement. | 8:30 | |
Now it's worth emphasizing that there is absolutely nothing | 8:35 | |
that can be done by changing reserve requirements | 8:38 | |
that cannot be done by open market operations. | 8:40 | |
Open market operations are | 8:43 | |
a more sensitive and effective tool. | 8:44 | |
Changes in reserve requirements are a blood instrument | 8:47 | |
which are discontinuous in time and, on the whole, | 8:51 | |
are a poor instrument for monetary (mumbles). | 8:54 | |
Why then did the Fed change reserve requirements? | 8:56 | |
I think the answer is very clear. | 8:59 | |
The Fed has been very greatly concerned about the argument | 9:01 | |
that high interest rates mean large bank profits, | 9:05 | |
and in fact, the profits of banks have been very good. | 9:08 | |
I think there is, my own belief is that the Fed is anxious | 9:11 | |
to take measures which will keep bank profits | 9:15 | |
from going up too rapidly. | 9:18 | |
The one effect of a reserve requirement increase | 9:19 | |
which is different from an open market sale | 9:22 | |
of bonds of exactly the same amount, | 9:28 | |
the one effect that is different is | 9:31 | |
that the reserve requirement increase, | 9:32 | |
in effect, reduces the profits of banks | 9:35 | |
by requiring banks to keep a larger amount | 9:37 | |
of their assets in a non-interest bearing form, | 9:40 | |
namely in the form of reserve. | 9:42 | |
And I believe that that is the explanation | 9:44 | |
for the reserve requirement increase, | 9:46 | |
a purely political explanation, not in any way | 9:47 | |
an economic or a monetary policy explanation. | 9:51 | |
Rose | What has the outlook been | 9:55 |
for the interest rate structure? | 9:57 | |
Milton | Well the interest rate structure has been, | 9:59 |
as you all know, what economists have come to call | 10:02 | |
an inverted term structure that as short-term rates, | 10:07 | |
if of anything have tended to be higher | 10:11 | |
than long-term rates, whereas the normal term structure | 10:12 | |
is short-term rates rising relative to, | 10:15 | |
short-term rates being lower than long-term rates. | 10:19 | |
It's not clear what is going to happen about this. | 10:23 | |
If indeed, as seems to be the case, something of a slowdown | 10:26 | |
in the physical economy is in process. | 10:31 | |
If we are reaching or passing a peak rate | 10:34 | |
of physical growth, typically, short-term interest rates | 10:40 | |
have reached their peak about the same time | 10:46 | |
that economic growth short-term cyclical growth | 10:49 | |
has reached its peak. | 10:51 | |
Very often you have the phenomenon that is now occurring, | 10:54 | |
what seems like an extremely rapid rise in short-term rates | 10:57 | |
just before they reach their peak and turn around. | 11:01 | |
That's been the case now in the past month or so. | 11:04 | |
You've had a very sharp run up in short-term rate. | 11:06 | |
I would therefore not be surprised to see short-term rates | 11:09 | |
peak out sometime in the next month or two. | 11:13 | |
Of course partly this will depend | 11:17 | |
on the character of the economic move. | 11:18 | |
If all we have is a mild slowing down on the rate | 11:21 | |
of economic growth, what I say may not occur. | 11:24 | |
On the other hand, if we have a mini-recession a la '67 | 11:27 | |
or a full-blown recession a la 1970, | 11:35 | |
albeit an inflationary recession, | 11:39 | |
if we have anything of that kind, | 11:42 | |
why then I think the likelihood is that short-term rates | 11:44 | |
will come down from their present levels. | 11:47 | |
Long-term rates are quite a different matter. | 11:50 | |
We observed in 1969 and 1970 that, | 11:52 | |
although short-term rates peaked with the cycle, | 11:56 | |
long-term rates continued rising for something | 12:00 | |
like oh six months, nine months after the peak in the cycle. | 12:02 | |
This is a pattern which we observed | 12:07 | |
frequently before World War I. | 12:09 | |
In fact, it was a typical pattern for long-term rates. | 12:11 | |
I would not be at all surprised | 12:15 | |
if that pattern would be repeated again this time. | 12:17 | |
After all, long-term rates are, | 12:20 | |
from a fundamental point of view, low. | 12:22 | |
The rate on high-quality corporate securities | 12:25 | |
is somewhere around 7.75%. | 12:29 | |
There is hardly anybody who expects | 12:33 | |
that the rate of inflation over the next four | 12:35 | |
or five years will be less than 4%. | 12:36 | |
That means that the real rate of interest | 12:42 | |
in long-term securities is about 3.75% at the very highest. | 12:43 | |
I think a much more reasonable expectation of the rate | 12:49 | |
of inflation is it'll be something | 12:52 | |
like 5% or 6% in which case you have a long-term rates | 12:53 | |
in a real terms of 1%, 2%. | 12:57 | |
Over the past 200 years, real rates calculated | 13:00 | |
in this way have tended to run around 3% to 4%. | 13:03 | |
So long-term rates far from being abnormally high are, | 13:06 | |
if anything, relatively low in light | 13:09 | |
of the inflation that can be expected. | 13:11 | |
In addition, as I say, we have the situation | 13:14 | |
in which many corporate enterprises | 13:17 | |
have undertaken capital expenditure programs | 13:19 | |
which cannot be stopped on a dime. | 13:24 | |
They will be looking for funds to finance them. | 13:27 | |
Thus, we are likely to have | 13:30 | |
a fairly large demand for long-term funds. | 13:31 | |
Thus, my own belief is that the most likely pattern, | 13:38 | |
the most likely way in which the interest rate | 13:43 | |
structure is going to resume its more normal shape is | 13:46 | |
by both short and long rates contributing to it. | 13:49 | |
That is short rates will tend to come down, | 13:53 | |
and long rates will tend to go up. | 13:55 | |
That doesn't mean that short rates | 13:58 | |
may not go up for a while. | 14:00 | |
I'm talking about what may happen | 14:02 | |
over the next three, four, five, six months, | 14:03 | |
and it's over that period that I think | 14:06 | |
the most likely development is a rise | 14:08 | |
in long-term rates, a decline in short-term rates. | 14:10 | |
Rose | Let's answer some questions that are | 14:14 |
from subscribers that have come in. | 14:16 | |
Carl Dull from Integon Corporation writes, | 14:20 | |
"You said that the monetary expansion in 1972 | 14:23 | |
"was not the cause of the high rate of inflation in 1973. | 14:26 | |
"We have reasoned that if the expansion | 14:31 | |
"of the money supply in '72 had been held to 6%, | 14:33 | |
"which Mr. Burns set as his goal, | 14:37 | |
"rather than the 8.5% which took place, | 14:39 | |
"then business activity would have been much less | 14:42 | |
"about bully and demand less great. | 14:45 | |
"Thus, prices for most items would be more stable. | 14:47 | |
"Admittedly, items in short supply | 14:51 | |
"such as certain foods would have price pressures, | 14:53 | |
"but on the whole, inflation would be much less | 14:56 | |
"with the less bully economy. | 14:58 | |
"Please clarify this matter for us." | 15:00 | |
Milton | There is really no difference of opinion | 15:02 |
between us on this matter. | 15:04 | |
Mr. Dull is certainly right that | 15:08 | |
if monetary expansion had been 6% instead of 8.5% | 15:11 | |
you would've had a less inflationary atmosphere. | 15:15 | |
Prices would have risen less rapidly. | 15:18 | |
I certainly agree with him on that. | 15:21 | |
I have long believed that monetary expansion | 15:22 | |
in '72 was too high and should have been lower. | 15:25 | |
My point was rather a different one. | 15:28 | |
It has to do with the magnitude of the inflation, | 15:30 | |
not the existence of the inflation. | 15:32 | |
The high rate of monetary expansion in '72 set a basis | 15:34 | |
for the inflation, but it, by itself, | 15:38 | |
would not have produced a rate of inflation | 15:40 | |
as high numerically as the one we did experience. | 15:43 | |
On the basis of past evidence, | 15:46 | |
on the the basis of the relationship that has prevailed | 15:50 | |
in the past between the rate of monetary growth | 15:52 | |
and the rate of income growth, | 15:56 | |
you would never have gotten something | 15:59 | |
like a 14% rate of growth in GNP | 16:01 | |
in the first quarter of 1973. | 16:04 | |
You might've gotten one of about 10% or 11%. | 16:07 | |
That would still have been too high. | 16:09 | |
You never would've gotten the rate | 16:12 | |
of inflation of CPI at 9%. | 16:13 | |
You might've gotten one of 6%. | 16:16 | |
That would've still been too high. | 16:17 | |
It was this difference between the actual rate of inflation | 16:19 | |
and the rate of inflation that would've been associated | 16:23 | |
with the unduly high monetary growth that I was referring to | 16:26 | |
when I said that the monetary expansion | 16:29 | |
in 1972 was not the cause of the numerical value | 16:32 | |
of the rate of inflation in '73. | 16:37 | |
Rose | Mr. John Cassen from Brown Brothers Harriman | 16:40 |
sent the following letter. | 16:43 | |
"I have been interested in your recent remarks | 16:45 | |
"on how the lags between changes in monetary growth | 16:48 | |
"and their impact on the economy appear to have widened. | 16:51 | |
"Any further comment that you might make | 16:54 | |
"on this subject would be greatly appreciated." | 16:56 | |
Milton | Well I'm afraid there is some misunderstanding. | 16:59 |
I do not believe I have said that there has been | 17:02 | |
any widening in the lags between changes | 17:06 | |
between monetary growth and their impact on the economy. | 17:08 | |
I believe Mr. Cassen must be referring | 17:11 | |
to a very different comment which is the difference | 17:14 | |
between the lag as it affects physical output | 17:17 | |
and the lag as it affects prices or inflation. | 17:22 | |
As far back as we have evidence, and I may say not only | 17:27 | |
for the United States but for other countries, | 17:31 | |
if you compare the rate of change of the money supply | 17:33 | |
on the one hand with the rate of change of economic activity | 17:36 | |
on the other of physical activity of industrial production, | 17:41 | |
real GNP and so on, there is a time difference | 17:44 | |
of about six to nine months between those two. | 17:49 | |
That's true for the United States so far as we can tell | 17:52 | |
all the way back to the 1870s or 80s. | 17:56 | |
It's true for Japan. It's true for Israel. | 17:59 | |
It's true for whatever other countries | 18:01 | |
I have been able to get figures for. | 18:03 | |
Since the movements in physical output tend to go along | 18:05 | |
with the movements in nominal GNP, in dollar value of GNP, | 18:08 | |
it is also true that the lag between changes | 18:12 | |
in monetary growth and changes in nominal dollar income | 18:15 | |
also tend to be about six to nine months, | 18:20 | |
a little bit longer, maybe on the nine month side | 18:22 | |
rather than the six month side | 18:25 | |
while the physical output will be | 18:27 | |
on the six month side rather than the nine month. | 18:28 | |
However, if you separate out the price component of income, | 18:31 | |
independently from the physical output, | 18:35 | |
whether you take an index number, like Consumer Price Index, | 18:37 | |
or an index number, like the implicit index | 18:41 | |
used in calculating real GNP, | 18:45 | |
then you find that the time span, | 18:49 | |
the time difference between changes in monetary growth | 18:52 | |
and changes in prices is very much longer, | 18:55 | |
more nearly of the order of 20 to 24 months. | 18:58 | |
That is a year and a half to two years. | 19:02 | |
This is of course very clearly illustrated | 19:05 | |
by our recent experience. | 19:09 | |
We had a slowdown in the rate of monetary growth | 19:11 | |
in the beginning of 1969. | 19:16 | |
We had a slowdown in the rate of economic growth | 19:18 | |
about six to nine months later at the end of '69, | 19:21 | |
but we did not have a real slowdown in the rate of inflation | 19:24 | |
until well on into 1970 or early 1971. | 19:28 | |
A substantial slowdown. | 19:33 | |
You had an end to the inflation rates getting higher | 19:35 | |
and higher but they stayed high, | 19:39 | |
and you cannot really find very much of a turn | 19:40 | |
until you come to something like the end of 1970, | 19:44 | |
which is almost a two year lag. | 19:46 | |
Now our evidence on this relationship has not been explored | 19:49 | |
as fully as on the relationship between monetary growth | 19:54 | |
and physical output, so I have to speak | 19:58 | |
with a little bit less confidence. | 20:01 | |
But I have, I believe in this respect, | 20:03 | |
it may be that this lag has increased in recent decades | 20:06 | |
over what it was much earlier. | 20:10 | |
I suspect that in an earlier period, like the 1870s, | 20:12 | |
or in countries which have a much more flexible price system | 20:17 | |
than we do, this lag may be smaller, | 20:22 | |
but I cannot really document that very carefully. | 20:24 | |
In any event, the main point I wanna make is that | 20:27 | |
insofar as there has been any widening in the lag, | 20:29 | |
it has to do with the lag between monetary change | 20:32 | |
and price change, not with a lag | 20:36 | |
between monetary change and physical economic change. | 20:38 | |
Rose | Another subscriber, Michael Morgue, asks a question | 20:42 |
which is closely related to our preceding one. | 20:45 | |
He writes, "In a tape, you said that it typically took | 20:49 | |
"20 to 24 months for an increase | 20:53 | |
"in the money supply to be reflected in prices. | 20:55 | |
"My question is isn't the time period determined | 20:58 | |
"by our current plant utilization and unemployment rate | 21:01 | |
"at the time the money supply is being increased?" | 21:04 | |
Milton | Well you would think that that would be the case, | 21:07 |
and of course the most widely accepted views | 21:10 | |
about the way the economy works, that is the Keynesian views | 21:15 | |
which would emphasize the relationship | 21:18 | |
between spending and income, would argue along those lines. | 21:20 | |
That as those views say as long as there's unused capacity, | 21:25 | |
any increase in income will take the form | 21:28 | |
of an increase in output and not an increase in prices. | 21:30 | |
Yet the historical evidence does not really fit | 21:34 | |
that pattern very much. | 21:36 | |
It is clear that, in the first place, that there | 21:39 | |
is no such thing as really full utilization of capacity. | 21:43 | |
You can overutilize capacity | 21:46 | |
as well as underutilize capacity. | 21:48 | |
We have hardly ever hit the time when we had any kind | 21:50 | |
of an absolute ceiling on capacity. | 21:53 | |
In the next place, it turns out that | 21:57 | |
if you wanna know how rapidly prices will go up, | 21:59 | |
for example during a business cycle expansion, | 22:03 | |
you will get much more information | 22:06 | |
by asking how fast have prices been going up in the past | 22:08 | |
than you will be asking how large was the rate | 22:12 | |
of unemployment at the beginning of the expansion. | 22:17 | |
So that in fact the empirical evidence suggests | 22:20 | |
that the rate of utilization of capacity, | 22:23 | |
while it does have some relationship to the fraction | 22:25 | |
of an increase in income, which will take the form of prices | 22:28 | |
and a fraction which will take the form of output, | 22:31 | |
has a much looser relationship than one might | 22:33 | |
suppose a priori or than many people have supposed. | 22:37 | |
As a consequence, to the best of my knowledge, | 22:41 | |
the time lag between a change in monetary growth | 22:46 | |
and a change in prices is not really significantly affected | 22:50 | |
by the level of unemployment. | 22:56 | |
Now I have not explored this particular question | 22:59 | |
as fully as I have explored another question. | 23:02 | |
I have explored the question of whether the time lag | 23:05 | |
between a change in monetary growth | 23:10 | |
and a change in economic activity is related to | 23:12 | |
whether you have a vigorous expansion or a slow expansion, | 23:16 | |
whether you're in a big boom or a small boom, | 23:19 | |
whether you're in a contraction of minor or major form. | 23:21 | |
A priori, one would expect there, too, | 23:25 | |
your expectation would be that if you were | 23:28 | |
in a very sharp boom, it would take a longer time | 23:31 | |
for a slowdown in monetary growth to start biting | 23:36 | |
than if you were in a very mild boom. | 23:40 | |
Similarly with respect to an expansion of monetary growth, | 23:43 | |
yet I have been able to find no such differences at all. | 23:47 | |
So far as I can tell, the time delay between monetary change | 23:51 | |
and economic change is the same for expansions | 23:57 | |
as it is for contractions. | 23:59 | |
It's the same for rapid expansions | 24:00 | |
as it is for slow expansions and so on. | 24:03 | |
This rather confirms me in my belief | 24:07 | |
that probably the same thing is true for the relation | 24:10 | |
between monetary change on the one hand | 24:13 | |
and price change on the other. | 24:15 | |
Now I think another factor is far more important, | 24:18 | |
and that's a factor that it's hard to evaluate. | 24:21 | |
Consider a country in which price change | 24:24 | |
has been very variable, in which you have gone | 24:28 | |
from large inflations to small inflations | 24:31 | |
to deflations over short periods of time, | 24:34 | |
a country like Chile or Argentina or Brazil. | 24:36 | |
There seems to be little doubt that in such a country | 24:40 | |
the time delay between a change in monetary growth | 24:43 | |
and a change in the rate of inflation is much briefer | 24:47 | |
than in a country like the United States | 24:51 | |
in which you have had relatively stable prices. | 24:53 | |
So I think the more important factor about the lag | 24:55 | |
between monetary change and price change is really | 25:00 | |
the degree of variability in past inflation rather than the | 25:04 | |
extent of utilization of your plant and equipment. | 25:09 | |
Rose | Mr. Morgue has two more questions. | 25:13 |
I'm not sure we'll have time | 25:16 | |
for both of them, but we'll try. | 25:17 | |
The first one is, "If the domestic money supply | 25:19 | |
"is increased by X amount of dollars, | 25:22 | |
"but this increase goes overseas, what effect does this have | 25:24 | |
"on our money supply as it relates | 25:28 | |
"to increasing business activity, the stock market, etc.?" | 25:30 | |
Milton | Well that's a very hard question | 25:33 |
to answer because it's a hard question | 25:35 | |
to define precisely what it means. | 25:36 | |
Mr. Morgue expresses his question in relation | 25:39 | |
to the eurodollar market and sort of implies, | 25:43 | |
there is implicit in his question, | 25:47 | |
the notion that the eurodollar market is fed | 25:49 | |
by dollars going overseas that an increase | 25:54 | |
in the number of dollars deposited | 25:57 | |
in the eurodollar market is equivalent to U.S. dollars. | 25:58 | |
In an image which he doesn't intend | 26:02 | |
and which goes much farther, the image that you have | 26:04 | |
is that of greenbacks being wrapped up in packages, | 26:07 | |
put on a boat, and shipped overseas. | 26:09 | |
Well that isn't the way it happens at all. | 26:11 | |
The expansion in eurodollar markets, typically speaking, | 26:13 | |
is not at the expense of any increase | 26:16 | |
in the amount of money in the United States. | 26:19 | |
It's a case of the creation of dollars by European banks. | 26:21 | |
Those dollars are not included | 26:25 | |
in the U.S. money supply figures, | 26:27 | |
and if we have an increase in the U.S. money supply figures, | 26:29 | |
that is completely independent in the first instance | 26:32 | |
of any change in the amount of eurodollars abroad. | 26:36 | |
The only way in which those dollars can, | 26:41 | |
in a meaningful sense, go abroad is if they are held | 26:43 | |
by a foreign bank or a foreign resident, | 26:47 | |
but they are held in the United States | 26:50 | |
because dollars held by foreign banks | 26:52 | |
and foreign residents are included in the U.S. money supply. | 26:54 | |
Now if there were an increase in the U.S. money supply, | 27:01 | |
as recorded, which was held by, let us say, a foreign bank, | 27:06 | |
one would a priori expect that increase to have less | 27:11 | |
of an expansionary effect on U.S. economic activity | 27:15 | |
than if it were held by a U.S. citizen. | 27:18 | |
But of course that depends on why the foreign bank | 27:22 | |
wants to hold the dollars. | 27:25 | |
Perhaps it wants to hold the dollars | 27:26 | |
because it is in the process of financing the acquisition, | 27:27 | |
for example of a U.S. plant by a foreign company. | 27:31 | |
If that is the case, why then, | 27:35 | |
this is a very temporary phenomenon. | 27:37 | |
In the main, I think it is very hard | 27:39 | |
to make any clear definite statement along these lines. | 27:41 | |
We know all too little about the effect of the composition | 27:44 | |
of the dollar and money supply upon its effect | 27:48 | |
on the economy to be able to make | 27:50 | |
any sophisticated statements along these lines. | 27:52 | |
Rose | He has one additional question | 27:55 |
relating to money held abroad, | 27:58 | |
and perhaps you can answer it briefly. | 28:00 | |
"In what we define as our money supply | 28:01 | |
"which is currently $258 billion, | 28:03 | |
"does this figure include money held in foreign banks?" | 28:06 | |
Milton | The answer is no, it does not. | 28:09 |
It neither includes dollar liabilities of eurodollar banks, | 28:11 | |
whether to American residents or others, | 28:18 | |
nor does it include the dollars held by U.S. | 28:21 | |
I'm sorry. | 28:25 | |
Neither does it include foreign currencies held | 28:26 | |
by U.S. citizens in foreign banks. | 28:29 | |
If a U.S. citizen has a pound deposit in a British bank, | 28:31 | |
that is not included in the U.S. money supply. | 28:34 | |
The figure does include, however, | 28:36 | |
deposits held at banks in the United States | 28:40 | |
by foreign banks and by foreign individuals. | 28:44 | |
It does not include any money held | 28:49 | |
by anybody in any foreign bank. | 28:51 | |
Rose | That brings us to the end of this tape. | 28:53 |
Thank you very much. | 28:56 | |
Remember subscribers, if you have any questions or comments, | 28:57 | |
please send them to Instructional Dynamics Incorporated. | 29:00 | |
166 East Superior Street, Chicago, Illinois, 60611. | 29:03 | |
We shall be visiting with you again in two weeks. | 29:09 |
Item Info
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