Tape 74 - International Monetary Developments, Domestic Recovery
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| - | Hello, this is William Clarke of the Chicago Tribune | 0:02 |
| welcoming you once again on behalf of | 0:04 | |
| Instructional Dynamics to another visit with the | 0:07 | |
| eminent economist Professor Milton Friedman | 0:10 | |
| of the University of Chicago and we're recording | 0:12 | |
| this interview on Thursday May 20th, and we should | 0:15 | |
| add the year I guess, 1971. | 0:20 | |
| Milton, the last time we talked was very shortly after | 0:23 | |
| the eruption of the so called monetary crisis in Europe. | 0:27 | |
| You made some comments at that time and I wonder | 0:32 | |
| if the events that have happened in the meantime | 0:36 | |
| have served to confirm your feelings of two | 0:40 | |
| and three weeks ago? | 0:44 | |
| - | On the whole I think they have. | 0:45 |
| The German market's been floating for that period | 0:47 | |
| and no the skies haven't fallen, no enormously disruptive | 0:51 | |
| events have happened because a free market is determining | 0:57 | |
| the price of the mark instead of it's being pegged | 1:00 | |
| to a fixed rate. | 1:02 | |
| One of the interesting things that occurred that surprised | 1:04 | |
| many people is that the mark rose in value relative | 1:06 | |
| to it's former parody level by a rather small percentage, | 1:10 | |
| at the maximum a little over 3% and since then it's | 1:16 | |
| gone down a little. | 1:19 | |
| The reason for that, I think, is what I was stressing | 1:22 | |
| last time that you have a large amount of marks being | 1:24 | |
| held in Germany right now that is really being held | 1:27 | |
| for the purpose of resale, it's not really being held | 1:31 | |
| for business purposes in Germany, it's speculators | 1:35 | |
| who bought the marks in the hope of making a profit | 1:37 | |
| and every time any one of them tries to sell, | 1:40 | |
| well that tends to drop down the price of the mark, | 1:43 | |
| it's the like the situation after the gold price was freed. | 1:45 | |
| You had all of the gold that had been accumulated | 1:49 | |
| in private hands overhanging the market and now you | 1:51 | |
| have all of the marks overhanging the market. | 1:54 | |
| What happens from here on out to the price of the mark | 1:56 | |
| depends critically on what policy the | 1:59 | |
| German Central Bank follows. | 2:01 | |
| It has a large hoard of dollars as a result. | 2:03 | |
| If it were to decide to sit on those dollars and just | 2:06 | |
| let the speculators hang loose, just leave the speculators | 2:08 | |
| stranded with their holdings of marks, then I wouldn't | 2:12 | |
| be a bit surprised to see the price of the mark come down | 2:15 | |
| even below it's pre-parody level. | 2:17 | |
| On the other hand it may very well be, | 2:20 | |
| and probably will be, that the German Central Bank is | 2:22 | |
| just going to feed out those dollars slowly as the | 2:26 | |
| speculators get discouraged about holding on to their | 2:31 | |
| marks in such a way as to let speculators have a minor gain | 2:33 | |
| but not a major one but I would suppose that there will be | 2:37 | |
| no very sharp rises in the mark in the next couple months | 2:41 | |
| until the speculative overhang has been worked out. | 2:45 | |
| The price of the Swiss franc was revalued upward by | 2:51 | |
| more than double the market revaluation of the mark. | 2:55 | |
| Now another factor that's in prevail for the mark is that | 2:59 | |
| it is not really at all clear what the long run | 3:03 | |
| value should be. | 3:06 | |
| Germany is having a good deal more rapid inflation | 3:08 | |
| at the moment than we are. | 3:11 | |
| This is true of both the final product prices and, | 3:12 | |
| to an even greater extent, of wages and salaries factor | 3:16 | |
| prices which have been rising at very high rates. | 3:18 | |
| It's not clear that on a current account, | 3:22 | |
| the mark is greatly undervalued. | 3:25 | |
| The great inflow of dollars has not been through | 3:28 | |
| current accounts, that is through purchases and sales | 3:32 | |
| of goods and services, it's primarily been on | 3:34 | |
| capital account and once the lure of the possibility | 3:36 | |
| of a greater gain dies down it may well be that it will | 3:40 | |
| turn out, a year from now let us say, that they price | 3:46 | |
| of the mark is too high and not too low and that's why | 3:49 | |
| I think the Germans will be very wise if they don't | 3:52 | |
| hasten to set a new price. | 3:56 | |
| Now, one other development did occur in Germany | 3:58 | |
| that's important and that was that Mr. Karl Schiller, | 4:00 | |
| the economics minister, took over another portfolio, | 4:04 | |
| I've forgotten the exact terminology but there was | 4:07 | |
| another man in charge of another aspect of the | 4:10 | |
| economics matters who retired supposedly because | 4:12 | |
| of health and age but presumably primarily because | 4:15 | |
| there was a dispute about policy and Schiller has all along | 4:18 | |
| been perhaps the strongest person in the German government | 4:22 | |
| who has been interested in and willing to accept | 4:24 | |
| floating exchange rates so I continue to believe that | 4:28 | |
| they will let the exchange rates float for a long time. | 4:31 | |
| Beyond this, there has been, so far as I can see, | 4:34 | |
| no development, things have gone as you might have | 4:37 | |
| expected them to. | 4:39 | |
| The interesting question is whether how soon you will | 4:40 | |
| have a similar crisis in the yen. | 4:43 | |
| - | I was just making a note; Japanese yen. | 4:46 |
| - | Right, well you see the yen situation is | 4:49 |
| very straight forward. | 4:52 | |
| The yen is undervalued, there is no doubt about it | 4:53 | |
| in the sense that it has been accumulating dollars | 4:56 | |
| at a very rapid rate. | 4:58 | |
| Some years back the Japanese had total foreign exchange | 5:01 | |
| reserves of under a billion dollars, | 5:04 | |
| they now have something close to seven billion dollars | 5:07 | |
| and they've been gaining it at the rate of | 5:09 | |
| half a billion dollars a month or something of that | 5:11 | |
| order of magnitude, a billion dollars a month, | 5:14 | |
| I'm not sure, you hear various figures around and | 5:15 | |
| certainly it depends on which month. | 5:18 | |
| But any rate, a foreign exchange reserve of six and a half | 5:19 | |
| to seven billion dollars is an enormous sum for Japan | 5:23 | |
| to hold and they have been having that, even that, | 5:26 | |
| only after measures which they have taken to discourage | 5:29 | |
| the inflow of dollars. | 5:33 | |
| The Japanese control much more closely their capital | 5:36 | |
| movements and investment in Japan, transactions of | 5:39 | |
| their citizens abroad to a far greater extent than | 5:43 | |
| most other countries do. | 5:46 | |
| Now it would be very sensible, I believe, for Japan | 5:49 | |
| to relax all those restrictions, if they relax the | 5:52 | |
| restrictions on their own citizens traveling abroad | 5:54 | |
| for example and things like this, so that might be | 5:56 | |
| an important factor that would reduce the balance of | 6:00 | |
| payments surplus coming in. | 6:02 | |
| But there's also enormous pressure on them to | 6:05 | |
| appreciate the yen. | 6:07 | |
| The only question is when? | 6:09 | |
| They have been, there was no great speculative rush | 6:11 | |
| to the yen, there was some, figures that are cited | 6:15 | |
| are about three or four million dollars that went into | 6:17 | |
| the yen and speculative rush and that is primarily | 6:20 | |
| because the yen price has been kept fixed now since, | 6:24 | |
| if my memory serves me right, it's 48, maybe it's a | 6:28 | |
| little later than that, at any rate, it's 360 yen | 6:33 | |
| has been, there have been no changes in a very long time, | 6:36 | |
| I don't trust my memory as to when that | 6:41 | |
| rate was established. | 6:43 | |
| It was at the time of the Dodge mission I think. | 6:45 | |
| But at any rate, for at least 10 or 15 years | 6:48 | |
| you've had that rate and the Japanese have held it there | 6:50 | |
| and so I think that's why market participants | 6:54 | |
| are a little hesitant to rush in. | 6:56 | |
| Yet some time within the next six, 12, 18 months | 6:58 | |
| that rate will be changed and before it is changed | 7:02 | |
| there will be an attempt at rush in. | 7:06 | |
| However, it's a little harder to rush in to the yen | 7:07 | |
| than it is into the mark because of these controls. | 7:10 | |
| The Japanese control very closely the amount of yen | 7:13 | |
| that are available in the European market and they have | 7:16 | |
| very real restrictions on their own banks at home. | 7:19 | |
| But one way or another, people are pretty clever | 7:24 | |
| and so I predict that some time in the next six months | 7:26 | |
| or year you will see a yen crisis like the mark crisis. | 7:29 | |
| - | Hmm, that's interesting. | 7:32 |
| Milton, Arthur Burns, Chairman of the Federal Reserve Board, | 7:34 | |
| talked yesterday, testified before the | 7:37 | |
| Senate Banking Committee. | 7:39 | |
| He revived talk about his incomes policy, | 7:41 | |
| talked on his own behalf anyway, and he offered a | 7:46 | |
| five point program, or five steps to do, | 7:49 | |
| as he said, improve the international position of the dollar | 7:53 | |
| and I thought that your subscribers would be interested | 7:57 | |
| in your comments on those five proposals. | 8:00 | |
| The first was restoring price stability in | 8:03 | |
| the United States and this, he called, | 8:07 | |
| the overriding need. | 8:09 | |
| - | Well I think that is the overriding need for the | 8:11 |
| United States and the world. | 8:13 | |
| However, the question is how and unfortunately | 8:15 | |
| Mr. Burns again repeated in this connection his conviction | 8:19 | |
| that a cogent incomes policy is a necessary part | 8:23 | |
| of the effort. | 8:26 | |
| Now, of course, a cogent incomes policy is, | 8:27 | |
| well one man's cogency may be another man's lack of wisdom. | 8:30 | |
| I believe that the only kind of an incomes policy | 8:35 | |
| that would make any sense, as I've argued I think | 8:38 | |
| on previous tapes, would be emphasis on a cost of living | 8:40 | |
| escalator clause in various contracts that would prevent | 8:47 | |
| unrealistic wages from being reached because people | 8:52 | |
| have false expectations about what's going to happen | 8:56 | |
| to the price levels. | 8:58 | |
| The most important element of restoring price stability | 9:00 | |
| is a steady monetary policy. | 9:06 | |
| Unfortunately while on the whole the fed has behaved | 9:08 | |
| very well, as we know, it hasn't been very stable. | 9:12 | |
| We had this enormous explosion from February to April | 9:18 | |
| in the quantity of money. | 9:22 | |
| Now since then the fed has, the quantity of money | 9:24 | |
| has more or less been moving, it came down a little | 9:27 | |
| and then it's been moving horizontally, | 9:29 | |
| it's been going up and down, it's perfectly clear | 9:30 | |
| from the figures that the fed has been trying over the | 9:32 | |
| past few weeks to hold down the quantity of money | 9:36 | |
| and offset the mistake which it made in the earlier quarter | 9:39 | |
| and that's a good sign from the point of view of | 9:42 | |
| the long run stability. | 9:44 | |
| I don't know what the last week's figures are | 9:46 | |
| going to show because in connection with the | 9:47 | |
| international monetary crisis there were reports | 9:49 | |
| in the newspapers that the fed had engaged in | 9:52 | |
| extensiVE open market operations in order to avoid | 9:55 | |
| tightness in New York and it may be that the money | 9:58 | |
| supply when it comes out for the last statement week, | 10:01 | |
| those figures aren't available as we talk, | 10:04 | |
| they won't be until tomorrow, | 10:06 | |
| it may be that that will show a jump. | 10:08 | |
| But if so, I think it will prove temporary but in | 10:10 | |
| any event I certainly agree with Mr. Burns | 10:12 | |
| that the most important effective single thing | 10:15 | |
| that is required for a decent monetary system in | 10:17 | |
| the United States, and in the world, is a relative | 10:21 | |
| price stability in the United States. | 10:25 | |
| - | You don't look favorably on this wage price review board | 10:27 |
| that he talks about. | 10:31 | |
| - | No I certainly do not, I think the wage price review | 10:33 |
| board is window dressing, I think that in so far as | 10:36 | |
| it's more than window dressing. | 10:40 | |
| Every time you set up an agency like that it's | 10:42 | |
| turned out the be a way in which the employers | 10:45 | |
| and the labor unions could get together to | 10:48 | |
| exploit you and me, Mr. Consumer. | 10:50 | |
| So I think that the less said about that kind of | 10:53 | |
| thing, the better. | 10:56 | |
| - | The second of his five points, Mr. Burns' five points | 10:57 |
| yesterday, was continuation of restraints on | 11:00 | |
| private capital outflows. | 11:03 | |
| - | Well I'd disagree sharply with that. | 11:06 |
| I can understand from a short run point of view | 11:08 | |
| there is no doubt that so far as the next six months | 11:11 | |
| are concerned restraining private capital outflows | 11:14 | |
| in the form of restraints on private investment abroad, | 11:18 | |
| bank lending will keep down the number of dollars | 11:22 | |
| that immediately come into the hands of the | 11:25 | |
| German Central Bank or the other central banks | 11:28 | |
| but from any longer term point of view, | 11:31 | |
| the restraints on private capital outflows are | 11:34 | |
| counter productive, both from our point of view | 11:36 | |
| and from the point of view of the world monetary system | 11:40 | |
| as a whole. | 11:42 | |
| - | If the dollar is going to be the international currency | 11:43 |
| it can serve that purpose best if it is as free | 11:47 | |
| as possible to move around. | 11:50 | |
| It seems to me if you stop and ask yourself whether | 11:52 | |
| it would be desirable to try to have restraints on | 11:55 | |
| the movements of capital out of Illinois in order | 11:58 | |
| to prevent Illinois adjustments to changes in conditions | 12:01 | |
| I think you would come up with a negative conclusion | 12:04 | |
| and I think the same thing is true for the world | 12:06 | |
| as a whole. | 12:08 | |
| The only effect, as I've emphasized before, | 12:09 | |
| our balance of payments is ultimately determined | 12:12 | |
| by the decisions of other countries and not us | 12:15 | |
| because we are the people who are providing | 12:17 | |
| the world currency. | 12:20 | |
| The only effect of our restraining private capital outflows | 12:21 | |
| is to change the exchange rate to make the price of, | 12:25 | |
| let's say the US dollar in terms of the mark, | 12:30 | |
| a little lower than it otherwise could be, | 12:33 | |
| it doesn't really affect our balance of payments | 12:36 | |
| over the long period 'cause that's determined by the | 12:38 | |
| amount of dollars that other countries wanna accumulate | 12:40 | |
| and I think we're far better off to move in the | 12:43 | |
| opposite direction, to use this time of uncertainty | 12:45 | |
| when the mark is floating. | 12:48 | |
| Now is the time we ought to eliminate those restraints | 12:50 | |
| because then, as long as the mark Is floating, | 12:53 | |
| the market would adjust to it whereas if the mark is pegged | 12:55 | |
| and we eliminate the restraints you force an adjustment | 12:58 | |
| that cannot take place quickly. | 13:01 | |
| Of course that would be still better if the yen | 13:03 | |
| and the other currencies were free so that you could | 13:05 | |
| have a more general adjustment. | 13:07 | |
| - | Mr. Burns' third recommendation was that other nations | 13:09 |
| be persuaded to relax promptly, those were his words, | 13:12 | |
| restrictions on imports and investments abroad | 13:16 | |
| by their citizens and to undertake what he called | 13:20 | |
| a significantly larger contribution to the defense | 13:24 | |
| of the free world. | 13:27 | |
| - | Well those are excellent sentiments and I applaud them | 13:28 |
| but note the inconsistency between this point | 13:31 | |
| and the prior point. | 13:34 | |
| We are saying to other countries don't do what we do, | 13:36 | |
| do what we say. | 13:38 | |
| We are restraining, we are saying to them, | 13:40 | |
| in his second point Mr. Burns says that the US should | 13:42 | |
| continue to restrain private capital outflows. | 13:45 | |
| In his third point he says to other countries; | 13:48 | |
| don't you do that, you free up. | 13:50 | |
| Now I think he would be, and we would all be, | 13:53 | |
| in a better position if we were to take a single | 13:55 | |
| position and urge other countries to relax their | 13:57 | |
| restrictions on imports and investments and ourselves | 14:01 | |
| follow exactly the same policy. | 14:05 | |
| Now the problem of significantly larger contributions | 14:07 | |
| to the defense of the free world, | 14:09 | |
| that really is a political problem of the sharing | 14:10 | |
| of defense cost and there's no doubt that from the | 14:13 | |
| point of view of sensible political and economic policy, | 14:15 | |
| it's a very important factor, we have in fact been | 14:19 | |
| providing a shield, a military shield for Japan | 14:23 | |
| and for Western Europe which has enabled them | 14:27 | |
| to spend a very much lower fraction of their | 14:30 | |
| annual income on defense than we spend. | 14:32 | |
| A not negligible reason why Japan for example has been | 14:36 | |
| able to grow so rapidly is that it has had spend, | 14:39 | |
| it has spent something like, if I remember the figures, | 14:42 | |
| two to three percent of it's GNP, of it's national income | 14:45 | |
| on anything that you could call by a remote | 14:49 | |
| stretch military forces whereas we have been spending | 14:51 | |
| 10, 15 percent, and at times more, but I think it's | 14:53 | |
| about 10, 11 percent of our GNP. | 14:56 | |
| The rest of that then is available to Japan for investment | 14:59 | |
| and not for us. | 15:02 | |
| The same thing is true of Germany. | 15:04 | |
| From that point of view I think there's a great deal | 15:05 | |
| to be said for the fact that we oughta reduce the extent | 15:08 | |
| to which we underwrite the military expenses | 15:12 | |
| of other countries. | 15:15 | |
| But so far as the balance of payments point of view is | 15:16 | |
| concerned I would hate to see that argued on those terms | 15:19 | |
| because I wonder whether Mr. Burns and others would say | 15:22 | |
| that let's suppose for a moment that we happen to be | 15:25 | |
| in a surplus position, we were having a balance | 15:28 | |
| of payment surplus, would that be an argument for saying | 15:30 | |
| that we oughta increase our military expenditures | 15:32 | |
| and encourage them to reduce theirs? | 15:34 | |
| I think not. | 15:37 | |
| And I think you oughta use the right reasons for | 15:38 | |
| these arguments and not whatever reasons are at hand | 15:41 | |
| so I do not think the balance of payments reason | 15:44 | |
| is a valid reason for urging a change in | 15:46 | |
| expenditures on defense whether we're in a | 15:49 | |
| surplus or a deficit. | 15:51 | |
| It seems to me highly desirable that other countries | 15:53 | |
| should assume a larger part of the defense of | 15:56 | |
| the free world. | 15:58 | |
| - | Mr. Burns' next point, or next request or suggestion, | 16:00 |
| was that all nations depend less on monetary policy | 16:04 | |
| and make more active use of fiscal and budgetary policy | 16:08 | |
| in an effort to correct imbalances | 16:15 | |
| in international payments. | 16:17 | |
| - | This has become a very fashionable prescription | 16:19 |
| that many people are making and it has some merit | 16:22 | |
| on a purely abstract level but if you look at the facts, | 16:26 | |
| as I have tried to do, I think there's almost | 16:28 | |
| nothing to it. | 16:31 | |
| The degree to which you can substitute fiscal policies | 16:33 | |
| for monetary policies is extremely small and that, | 16:35 | |
| in fact, you really haven't got any choice. | 16:39 | |
| If you're going to try to follow his first proposal, | 16:42 | |
| which is to keep price stability in the US, | 16:46 | |
| you can do it only by a fairly steady monetary policy. | 16:49 | |
| Now what is true, and the point underlined is, | 16:53 | |
| is if we combine our present monetary policy | 16:56 | |
| with a fiscal policy which involves a very large deficit | 16:58 | |
| that will require the government to borrow a large amount, | 17:02 | |
| that will tend to make interest rates higher than they | 17:05 | |
| otherwise would be. | 17:07 | |
| Those higher interest rates will encourage capital | 17:09 | |
| from abroad to come here or discourage American capital | 17:12 | |
| from flowing abroad. | 17:15 | |
| In the one respect in which you could therefore affect | 17:16 | |
| the situation would be if, for example, Germany were to | 17:20 | |
| follow a fiscal policy of a large surplus and we were | 17:23 | |
| to follow a fiscal policy of a large deficit, | 17:28 | |
| that would tend to raise our interest rates, | 17:31 | |
| it would tend to lower their interest rates and it would | 17:33 | |
| therefore tend, other things the same for a given exchange | 17:36 | |
| rate of the mark to discourage the movements back and forth. | 17:38 | |
| But the magnitude of the effects that you can get | 17:43 | |
| that way are very small and you have to do very, very large | 17:46 | |
| movements in fiscal policies to get them. | 17:49 | |
| Moreover, one more element oughta be emphasized. | 17:52 | |
| Implicitly, this recommendation is on the assumption | 17:55 | |
| of pegged exchange rates. | 17:58 | |
| The whole issue disappears if you have free floating | 18:01 | |
| exchange rates, 'cause if you have free floating | 18:03 | |
| exchange rates, the movements and exchange rates can | 18:05 | |
| offset interest differences. | 18:08 | |
| Let us suppose, for example, that the interest rate | 18:11 | |
| in Germany is higher than the interest rate | 18:13 | |
| in the United States, well you might say that will | 18:15 | |
| encourage funds to move from the United States to Germany. | 18:17 | |
| However, generally speaking, the reason why the | 18:22 | |
| interest rate would be higher in Germany than in the | 18:25 | |
| United States would be that Germany was having a more | 18:27 | |
| rapid expansion or was having a bigger inflation | 18:30 | |
| and that would in turn mean that the exchange rate, | 18:33 | |
| that the value of the German currency, was going to | 18:35 | |
| depreciate over the next year and was gonna go down | 18:38 | |
| because the higher rate of inflation in Germany than | 18:41 | |
| in the United States would mean that the market | 18:43 | |
| would force the exchange rate down and the price of the | 18:46 | |
| mark would go from 28 cents to 27 cents. | 18:48 | |
| Alright now, you have a future's market in which you | 18:51 | |
| can now buy marks for future purchase and this brings | 18:55 | |
| in something which the technical economists call | 18:58 | |
| interest arbitrage, which is a very important phenomenon | 19:00 | |
| in floating rates. | 19:04 | |
| Let us suppose, let's take a simple case and look ahead | 19:05 | |
| for a year. | 19:08 | |
| Let's suppose that the interest rate in Germany is 6% | 19:09 | |
| and the United States 4%, then you say well you have a | 19:12 | |
| 2% advantage investing in Germany, | 19:15 | |
| but suppose the future's price of the German's | 19:18 | |
| mark a year from now is 2% lower than it is now, | 19:21 | |
| then that exactly offsets the interest arbitrage and | 19:25 | |
| thus movements and exchange rates can perform exactly | 19:28 | |
| the function which Mr. Burns and others here would have | 19:32 | |
| performed by these large changes in fiscal policy to produce | 19:35 | |
| changes in interest rates. | 19:40 | |
| - | The fifth point, his recommendation, | 19:41 |
| was adoption of measures to offset the effects of | 19:44 | |
| unpreventable short term capital flows such as, | 19:47 | |
| he said, the issuance by the United States government | 19:51 | |
| of securities to absorb funds from the overseas | 19:54 | |
| market for dollars or creating improved investment | 19:57 | |
| outlets in the United States for foreign central banks. | 19:59 | |
| - | Well, again, if you look at that you will see that | 20:03 |
| it rests basically on the premise of fixed exchange rates. | 20:05 | |
| It's only with fixed exchange rates that you'll have | 20:09 | |
| these large short term capital flows. | 20:11 | |
| One of the major proposals that people have been making | 20:14 | |
| years that we should have is strict physical controls, | 20:17 | |
| direct controls on short term capital movements and I | 20:22 | |
| think that would be disastrous again. | 20:24 | |
| If the dollar is going to be an international currency | 20:26 | |
| what kind of an international currency is it going to be | 20:29 | |
| if every time a US citizen wants to take $5000 abroad | 20:32 | |
| he has to stand in line at a Federal Reserve Bank | 20:36 | |
| to get permission to do it? | 20:38 | |
| That's not a way to make the dollar strong, | 20:40 | |
| that's a way to make it weak. | 20:41 | |
| This point, like most of the others, | 20:43 | |
| completely disappears if you accept floating exchange rates. | 20:45 | |
| That's why every time you read what anybody says about | 20:49 | |
| the balance of payments problems I urge you to ask yourself | 20:53 | |
| whether implicit in that statement is the assumption | 20:56 | |
| of pegged exchange rates. | 21:00 | |
| Most of the time it is and if you substitute | 21:02 | |
| floating exchange rates you will find that most of these | 21:04 | |
| harsh proposals for unpleasant measures | 21:07 | |
| become utterly unnecessary. | 21:10 | |
| - | Well that does cover the five and I'd like to move now | 21:13 |
| to a comment that was made yesterday at a meeting in | 21:17 | |
| which you participated, Milton, a meeting conducted by | 21:20 | |
| the Association of Purchasing Managers here in Chicago. | 21:24 | |
| One of the other participants was Martin Gainsborough | 21:27 | |
| and I understand that he was complaining that we are | 21:30 | |
| moving too slow toward recovery and that more measures | 21:33 | |
| oughta be taken to speed things up, is that correct? | 21:38 | |
| - | Oh, indeed he was. | 21:41 |
| He made a very, very emotional plea for the fact that | 21:42 | |
| this recovery was very slow and that it was going to | 21:46 | |
| remain slow and we desperately needed more measures | 21:50 | |
| and his favorite measure was the resumption of the 7% | 21:53 | |
| investment, credit for investment tax credit. | 21:57 | |
| - | How do you respond to that? | 22:01 |
| - | Well I think that Mr Gainsborough is making the mistake | 22:03 |
| that people so often make of not allowing for what's | 22:07 | |
| in the pipeline, looking at current conditions. | 22:12 | |
| If you look at the current recovery, if you look at | 22:15 | |
| what's been happening in the last four or five months, | 22:18 | |
| there is no doubt that it's relatively slow. | 22:20 | |
| As I've emphasized before this is in physical terms, | 22:23 | |
| in monetary terms it isn't compared to other things. | 22:26 | |
| The GNP rise in the first quarter of, | 22:29 | |
| readjusted to 30 something billion. | 22:31 | |
| - | 30.8 I think. | 22:34 |
| - | Yes. | |
| And in final demand to 33 billion dollars is gonna | 22:36 | |
| cause some blushes and embarrassment on the part of those | 22:39 | |
| people who have been criticizing so vigorously | 22:41 | |
| the administrations projections but at any rate, | 22:44 | |
| in real terms, you cannot have a rapid recovery | 22:47 | |
| given that you did not have a sharp, great decline. | 22:50 | |
| You haven't got a long way to go and therefore you | 22:53 | |
| can't go very, very fast. | 22:56 | |
| You didn't greatly deplete inventories therefore you | 22:57 | |
| haven't got much inventories to build up. | 23:00 | |
| Unemployment only went to 6% compared to 7% and more | 23:02 | |
| in earlier recessions therefore you haven't got so far | 23:06 | |
| to go the other way. | 23:08 | |
| But more important than that is in judging the present | 23:10 | |
| situation we have to take into account the fact that you | 23:13 | |
| now have had since last February an extremely stimulative | 23:16 | |
| monetary policy for those who believe in fiscal policy | 23:19 | |
| you have had an extremely stimulative fiscal policy. | 23:22 | |
| Both monetary and fiscal policy take time before | 23:25 | |
| they start work. | 23:28 | |
| What happens when you panic on the basis of current | 23:30 | |
| conditions is that you are tempted to press step | 23:32 | |
| the accelerator too hard. | 23:35 | |
| If we do that, if we go in the direction of pushing too hard | 23:37 | |
| and Mr. Gainsborough's words of tone and urgency | 23:40 | |
| were tougher than the measures he actually proposed. | 23:44 | |
| - | I see. | 23:47 |
| - | Because when it came down to it he really wasn't | 23:47 |
| in favor of a more rapid monetary policy, | 23:49 | |
| he wasn't in favor of a bigger government deficit, | 23:51 | |
| there was only one thing he was really in favor of which was | 23:54 | |
| the investment banks credit and I believe that that | 23:56 | |
| would not, first of all I think it's an undesirable measure, | 23:59 | |
| I was opposed to it when it was first instituted, | 24:02 | |
| I was in favor of repealing it when it was repealed, | 24:05 | |
| I am opposed to putting it in again because I think it is, | 24:08 | |
| it distorts the use of investment and produces an | 24:11 | |
| inefficient development of the capital structure. | 24:14 | |
| But in any rate, I do believe it would have any | 24:17 | |
| significant early effect. | 24:18 | |
| My own belief is that we are having a recovery, | 24:21 | |
| that it is a real recovery, that it will continue | 24:24 | |
| at a rate that will be relatively slow in real terms | 24:26 | |
| but nonetheless sufficiently rapid to get unemployment | 24:32 | |
| down to something like 5% by the end of the year. | 24:35 | |
| I think that's as fast as we can afford to go | 24:38 | |
| without reawakening inflation and the specter that haunts me | 24:41 | |
| is what happens if we do step too hard on the accelerator, | 24:45 | |
| if we have prices rising at seven, eight, nine, 10% | 24:48 | |
| in a year and a half from now, what then do we do? | 24:51 | |
| - | Thank you very much Dr. Friedman. | 24:54 |
| May I remind our subscribers that if you have questions | 24:56 | |
| or suggestions for subjects you would like Dr. Friedman | 25:00 | |
| to discuss on future tapes you may mail them to | 25:04 | |
| Instructional Dynamics Incorporated, | 25:07 | |
| 166 East Superior Street, Chicago, Illinois, 6-0-6-1-1 | 25:10 | |
| and I hope you will do that. | 25:15 | |
| This is William Clarke of the Chicago Tribune, | 25:17 | |
| we'll be visiting with Professor Milton Friedman | 25:18 | |
| again a couple of weeks hence. | 25:21 |
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