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Hello, this is Instructional Dynamics
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inviting you to another of our biweekly interviews
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with Dr. Milton Friedman, professor of economics
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at the University of Chicago.
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We are taping this interview on Thursday, December 31st.
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Professor Friedman,
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is there anything new on the economic front?
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Well, before I answer that,
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given the date, let me wish all of our subscribers
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a very happy and prosperous new year.
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On the whole, as my most recent tape
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giving the forecast indicates,
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I think that there are good prospects,
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that this will be
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a much better year than most people anticipate.
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I believe that we are likely,
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as I indicated in my last tape,
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to have a fairly substantial expansion
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during the course of this year,
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with a continuing
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reduction in the rate of inflationary price rise.
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So far as anything new since my last tape,
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there is very little.
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The year end is almost always a confused period,
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when there isn't very much active going on,
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and moreover, we are now at that state of the
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economic fluctuations, in which
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there is not a great deal to be said,
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a statement, in my opinion,
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we're near the bottom of a turning point
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and when, for quite a long time to come,
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if this view is right, there will be little to be said,
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except the fact that things are continuing to
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expand and go up.
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On the economic front, one thing that might be stressed
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is that the most recent several weeks
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of the monetary figures
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have shown a rather substantial rise
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in the quantity of money.
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Now as my subscribers know very well by now,
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this is a very erratic thing,
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and you do have wide ups and downs from week to week.
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But nonetheless, as far as they go,
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the figure suggests that the Fed is trying to make up
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for the rather slow rate of growth during the months of
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October and part of November and is going back up.
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The real question and the real issue will come
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over the next few months,
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whether the Fed has succumbed
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to the great political pressures that are bearing on it,
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to expand the quantity of money at a much more rapid rate
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than the five percent which they have in general
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taken as their goal,
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or whether they will resist this pressure
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and keep to a course which will, in my view,
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continue to provide the monetary basis
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for a moderate expansion
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without reawakening inflationary pressures.
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I still think that's up in the air.
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Insofar as one can say anything on the basis of sort of
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a spread of commentaries and comments
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in the papers and so on,
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it does look as if there is a little shift
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in the climate of opinion within Washington,
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as if within the administration, there has been some move
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away from the kind of panic that was developing
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shortly after the elections,
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a panic which was leading
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people to take positions
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quite different from their usual positions,
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leading some of the people like
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some of the members of the Council of Economic Advisors
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to urge rates of increase in the quantity of money
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of eight to ten percent.
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It seems as if there has been some shift away from that.
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A greater sense of realism and of moderation
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and of perspective on the part of the White House
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and of the administrations
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so that they are reconciling themselves
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to a slower rate of monetary growth
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and to a longer, spread out return
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to a position of high employment simultaneously
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with the tapering off of inflation.
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But all of that is mostly
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in the feel of the situation and the tone of the comments.
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Its hard to document it by any hard facts.
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You have been identified with the policy
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of a constant rate of monetary growth.
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In a recent tape, your colleague, Paul Samuelson,
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discussed this policy and argued rather strongly against it.
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Would you care to comment?
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Yes, I would be very glad to comment.
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I may say that this.
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First, let me
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say exactly what my policy position is and has been.
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I have, in recent years, been in favor
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of a policy under which, for the U.S.,
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the quantity of money
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would grow at a rate of somewhere around
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three to five percent per year,
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steadily, month in, month out, year in, year out.
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Now this policy needs to be defined
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in much greater precision,
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and I have in
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various of the writings in which I've presented it
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defined it in greater precision.
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It has to be defined
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first as to what money concept you're talking about,
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whether M1, M2, M3, M4, et cetera.
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And here, in general, I have based this recommendation
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on a money concept
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which is broader than M1,
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which includes time deposits in commercial banks,
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but which excludes CDs.
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This is the concept,
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that money total has been growing at something like
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eight to nine percent over the past year,
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so it's been growing much more rapidly than my long-term
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desired rate of growth.
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In the second place,
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one has to specify whether he's talking about
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seasonally adjusting money stocks,
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non-seasonally adjusting money stocks or not.
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This turns out to be an extremely important practical issue,
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because in fact, the seasonal movement in the money stock
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is not a natural phenomenon,
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but it is something which the Fed puts into it
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and something which has time and again
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confused Federal Reserve policy.
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And my own position has been in favor
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of a growth in seasonally unadjusted money supply
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at a steady rate of no attempt on the part of the Fed
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to compensate for seasonal movements
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in the total money supply,
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but to let that be taken up
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in seasonal movements and interest rates.
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Now I should qualify that in one respect.
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While not altering
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the rate of growth of the total money supply
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for seasonal purposes,
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it would be perfectly consistent for the Fed to adapt
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to whatever proportions of currency versus deposits
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is desired.
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For example, there is no doubt that
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during the end of the year period,
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during the Christmas shopping season,
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there is a tendency for currency to go up
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relative to deposits.
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And there is every reason
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why the Fed should accommodate that.
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That is, the public should be able to hold whatever
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its total money stock,
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in whatever proportions it desires
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as between currency on the one hand
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and deposits on the other.
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But beyond that, I have been in favor of no
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seasonal movement.
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Let me say one more thing.
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This is not the position I've always held.
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In fact, in a paper which I wrote in 1946,
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at the end of the war on a monetary framework
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for economic policy, for stability,
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I've forgotten the exact title,
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but it has some such title as that,
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A monetary framework for economic stability,
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I believe it's called.
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In that article, incidentally,
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an article in which I also introduced the concept
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of full employment, high employment surpluses
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and deficits about which so much is being heard of nowadays.
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In that article, I had a much more sophisticated policy,
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one which involved not a steady rate of growth
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in the quantity of money,
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but a rate of growth which would automatically rise and fall
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depending on government budget.
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That is, that policy involved a stabilizing budget policy.
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It involved having the government enact taxes
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and expenditure programs from a long-run point of view,
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which would mean that if there was a recession,
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you would tend to have a deficit.
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If there wasn't, boom, you would tend to have a surplus
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and then financing the defect by printing money
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or letting the surplus reduce the quantity of money.
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And this would have produced
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a cyclical movement in money supply.
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I have been led to shift away from that
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not because of the beliefs that it wouldn't be
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a reasonably satisfactory policy,
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but by the belief that it was much more
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sophisticated and complicated than was necessary.
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All of the economic and monetary research
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which I have done since that time
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has led me to believe that you don't need anything like so
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sensitive and sophisticated a policy
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to eliminate the major mistakes of monetary management
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and to give a pretty good basis for a stable society.
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Well, let me go back.
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My present policy, as I say,
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is and has been for some time now,
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this long run policy with a stable rate of growth.
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Now I emphasized that it was about three to five percent
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and that it was in M2 in a broader total,
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not what we're now doing because I wanna add one more point.
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The question is, given that you've been on
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a very different pattern of policy,
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given that you have been expanding the money supply
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at a much faster rate than that,
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what's the transition period by which you get
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to your long run desired basis?
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And here, I think I found it very much harder
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to be definite on that.
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If you are only a little bit away from your long run policy,
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I have always thought that it might be best
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simply to go to your long run policy and stick there.
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But by 1968, end of 1968,
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we had become very far indeed away from our long run policy.
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And therefore, it has seemed to me desirable since then
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to return, to get to the long run policy,
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not in one step but in a number of steps,
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to move gradually toward it
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rather than making a sudden jump.
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And that's why, in the past year or so,
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I have not, in fact, been advocating
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a rate of growth of M2
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of the broader money supply of five percent,
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but I have been accepting as tolerable
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and as reasonably satisfactory the Fed's own goal
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of something like five percent in M1
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which has been combined with something like
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eight or nine percent in M2.
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I think that is alright as an interim goal
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while we're tapering off this inflation,
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but I think that we must be prepared after a time
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to make another shift
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and at such a rate of growth of M1 of five percent.
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If indeed it is accompanied by a rate of growth
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of eight or nine percent in M2
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for the various technical reasons that it involves,
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it would be likely over the longer period
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to be an inflationary policy
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and would not in fact give an objective
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of a low rate of inflation.
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One more point along these lines.
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One of the things I have always emphasized
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in my advocacy of a constant rate of growth
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is that the constancy of the rate
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is much more important than the level,
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that it would be better to have a constant rate of growth
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that was seven percent a year, let's say,
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and keep it there indefinitely
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than it would be to have a rate of growth
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which averaged five percent
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by virtue of sometimes being 10%
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and sometimes being zero percent
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because it is the fluctuations in the rate of growth
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that introduce fluctuations in the economy
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and prevent the economy,
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prevent a stable set of expectations from being
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established that can be maintained indefinitely.
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So, to repeat, my objective is a steady rate of growth,
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ultimately at a rate of something like five percent in M2,
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currency plus time deposits other than CDs,
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as an interim matter, perhaps five percent in M1,
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but with the idea of later shifting on down to M2.
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Now what's wrong with this policy?
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Well, Professor Samuelson made a very good case,
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gave the arguments on the other side very persuasively.
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And I agree with a great deal of what he said,
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00:12:07.780 --> 00:12:10.370
and I wanna stress that agreement
270
00:12:10.370 --> 00:12:12.110
and then come out to where I disagree
271
00:12:12.110 --> 00:12:15.410
and why I come out at a different place than he does.
272
00:12:15.410 --> 00:12:19.100
His argument rested basically, I think, on three key points,
273
00:12:19.100 --> 00:12:22.440
with two of which I agree and one of which I don't.
274
00:12:22.440 --> 00:12:26.700
First, he argued that as people now look ahead
275
00:12:26.700 --> 00:12:28.073
for the next year or two,
276
00:12:29.250 --> 00:12:32.320
most predictions based on a constant rate of growth
277
00:12:32.320 --> 00:12:34.093
of about five percent in M1,
278
00:12:35.910 --> 00:12:39.973
most predictions imply a rather slow recovery,
279
00:12:40.930 --> 00:12:43.890
a rather slow expansion from here on out,
280
00:12:43.890 --> 00:12:46.120
with a relatively high level of unemployment
281
00:12:46.120 --> 00:12:47.890
during the next year,
282
00:12:47.890 --> 00:12:50.193
perhaps a level of unemployment during 1971,
283
00:12:51.860 --> 00:12:54.580
which might average somewhere in the neighborhood
284
00:12:54.580 --> 00:12:56.250
of five and a half to six percent
285
00:12:58.957 --> 00:13:01.890
and a rather slow tapering off of inflation.
286
00:13:01.890 --> 00:13:04.500
He cited a number of different estimates,
287
00:13:04.500 --> 00:13:06.470
those of the Federal Reserve Board of St. Louis
288
00:13:06.470 --> 00:13:09.190
and its monetary model
289
00:13:09.190 --> 00:13:11.040
and those of other models,
290
00:13:11.040 --> 00:13:13.190
all of which seem to suggest
291
00:13:13.190 --> 00:13:14.933
that over the next year or two,
292
00:13:17.205 --> 00:13:19.130
with an M1 of five percent,
293
00:13:19.130 --> 00:13:24.130
you would have a rather slow rate of expansion
294
00:13:24.210 --> 00:13:26.440
of the economy in real terms,
295
00:13:26.440 --> 00:13:28.480
a rather slow tapering off
296
00:13:28.480 --> 00:13:30.856
of the rate of price rise,
297
00:13:30.856 --> 00:13:32.893
relatively high unemployment.
298
00:13:34.030 --> 00:13:37.630
Now, I don't want to argue too much.
299
00:13:37.630 --> 00:13:39.330
Let me stop at that point first.
300
00:13:39.330 --> 00:13:42.130
On that point, he of course
301
00:13:42.130 --> 00:13:44.543
accurately describes what the models predict.
302
00:13:46.200 --> 00:13:48.583
I'm not prepared to say they're wrong.
303
00:13:50.270 --> 00:13:54.000
It may be that over the next year or two,
304
00:13:54.000 --> 00:13:55.023
we will have to,
305
00:13:55.940 --> 00:14:00.824
a monetary policy of a far presented rate of growth in M1
306
00:14:00.824 --> 00:14:05.519
will mean a rather slow tapering off of inflation
307
00:14:05.519 --> 00:14:08.423
and a relatively high level of unemployment.
308
00:14:09.670 --> 00:14:12.030
But I have very much less than full confidence
309
00:14:12.030 --> 00:14:13.730
that that's the case.
310
00:14:13.730 --> 00:14:15.680
I have much more confidence
311
00:14:15.680 --> 00:14:19.020
in what it will mean for nominal GNP
312
00:14:19.020 --> 00:14:20.930
for income in dollars
313
00:14:20.930 --> 00:14:23.190
than I do for the breakdown of that income
314
00:14:23.190 --> 00:14:24.640
between prices and output.
315
00:14:24.640 --> 00:14:28.090
I do not believe anybody has a satisfactory model,
316
00:14:28.090 --> 00:14:30.030
a satisfactory analysis which shows
317
00:14:30.030 --> 00:14:32.500
how it will break down between those two.
318
00:14:32.500 --> 00:14:34.400
As I have emphasized over and over again,
319
00:14:34.400 --> 00:14:37.800
the Federal Reserve Bank of St. Louis model
320
00:14:37.800 --> 00:14:40.920
is excellent on the side of nominal GNP.
321
00:14:40.920 --> 00:14:43.758
It is very, very much more
322
00:14:43.758 --> 00:14:46.780
tentative in terms of the breakdown
323
00:14:46.780 --> 00:14:50.793
between prices and output of any increases in nominal GNP.
324
00:14:52.436 --> 00:14:55.840
It turns out if you look at the various estimates,
325
00:14:55.840 --> 00:14:57.240
they do not disagree so much
326
00:14:57.240 --> 00:14:59.780
in respect to what will happen to nominal GNP.
327
00:14:59.780 --> 00:15:02.240
Almost all of them come out with a five percent
328
00:15:02.240 --> 00:15:05.270
rate of growth in M1 over the next two years,
329
00:15:05.270 --> 00:15:07.150
will mean something like a seven or eight percent
330
00:15:07.150 --> 00:15:10.120
rate of growth in nominal GNP at an annual rate,
331
00:15:10.120 --> 00:15:13.420
much higher between fourth quarter 1970
332
00:15:14.800 --> 00:15:16.280
and fourth quarter '71
333
00:15:16.280 --> 00:15:19.420
because of the abnormally low level at which we're starting,
334
00:15:19.420 --> 00:15:22.770
but on the average over years of something like that.
335
00:15:22.770 --> 00:15:25.303
Now, the question is,
336
00:15:26.388 --> 00:15:29.710
is it safer to go faster than that?
337
00:15:29.710 --> 00:15:31.930
If you go faster than that,
338
00:15:31.930 --> 00:15:34.810
are you ever going to be able to get back to a period
339
00:15:34.810 --> 00:15:39.810
of relatively low inflation and low unemployment?
340
00:15:41.510 --> 00:15:43.870
I am very skeptical that you can.
341
00:15:43.870 --> 00:15:47.690
I think unfortunately that we cannot push things farther,
342
00:15:47.690 --> 00:15:50.800
faster than they are capable of being pushed.
343
00:15:50.800 --> 00:15:52.960
And that's a pretty good compromise,
344
00:15:52.960 --> 00:15:55.280
something like seven or eight percent of nominal GNP,
345
00:15:55.280 --> 00:15:57.210
it's a pretty good compromise
346
00:15:57.210 --> 00:16:00.420
between a policy of really slamming on the break
347
00:16:00.420 --> 00:16:02.680
enormously producing very large employment
348
00:16:02.680 --> 00:16:06.070
in order to smash inflationary expectations immediately,
349
00:16:06.070 --> 00:16:09.010
and a policy of going so slow that you never get anywhere
350
00:16:09.010 --> 00:16:11.590
in terms of killing the inflation.
351
00:16:11.590 --> 00:16:13.450
Now, if you have such a policy,
352
00:16:13.450 --> 00:16:15.280
if you had confidence in such a policy
353
00:16:15.280 --> 00:16:16.650
and expectations adapt,
354
00:16:16.650 --> 00:16:18.380
then I think it is possible
355
00:16:18.380 --> 00:16:20.810
that the actual results would be much more favorable
356
00:16:20.810 --> 00:16:23.250
than those that the model suggests
357
00:16:23.250 --> 00:16:24.570
and Mr. Samuelson expects
358
00:16:24.570 --> 00:16:26.363
or that I myself am willing to say,
359
00:16:27.370 --> 00:16:28.780
put at the center of the stage.
360
00:16:28.780 --> 00:16:31.810
If you had something like, for example,
361
00:16:31.810 --> 00:16:34.703
a seven or eight percent GNP growth in the next year,
362
00:16:35.679 --> 00:16:37.250
and if that were combined with a three percent rate
363
00:16:37.250 --> 00:16:39.890
of growth in prices, which seems to me not impossible,
364
00:16:39.890 --> 00:16:42.130
given that in the fourth quarter of this year,
365
00:16:42.130 --> 00:16:43.760
prices are rising at something like
366
00:16:43.760 --> 00:16:45.740
the rate of four percent per year,
367
00:16:45.740 --> 00:16:47.290
if that came down fast enough
368
00:16:47.290 --> 00:16:49.380
so over the next year it averaged three percent,
369
00:16:49.380 --> 00:16:51.400
then you would have about a five,
370
00:16:51.400 --> 00:16:55.300
room for about a five percent rate of increase in GNP,
371
00:16:55.300 --> 00:16:58.350
which would bring you, by the end of 1971,
372
00:16:58.350 --> 00:17:01.150
to a lower level of unemployment than you have now.
373
00:17:01.150 --> 00:17:03.030
And you would be continuing in that direction.
374
00:17:03.030 --> 00:17:04.810
I think that would be fast enough,
375
00:17:04.810 --> 00:17:06.520
but maybe I'm wrong.
376
00:17:06.520 --> 00:17:08.450
Maybe expectations are so stubborn
377
00:17:09.340 --> 00:17:11.760
that in fact prices will rise over the next year
378
00:17:11.760 --> 00:17:13.660
at something like four percent,
379
00:17:13.660 --> 00:17:16.520
in which case there will be no net reduction
380
00:17:16.520 --> 00:17:18.170
in unemployment over that period.
381
00:17:22.250 --> 00:17:25.130
So the point I wanna make
382
00:17:25.130 --> 00:17:26.470
is that while I do not disagree
383
00:17:26.470 --> 00:17:28.270
with the general tenet of those predictions,
384
00:17:28.270 --> 00:17:32.320
I think that we have to attach a much larger range of error
385
00:17:32.320 --> 00:17:34.970
to the likely outcome
386
00:17:34.970 --> 00:17:37.450
that is implied by Mr Samuelson's comment.
387
00:17:37.450 --> 00:17:40.600
Now let me turn to the second point.
388
00:17:40.600 --> 00:17:43.340
His second point is that it is highly desirable
389
00:17:43.340 --> 00:17:45.540
to do better than these predictions suggest,
390
00:17:46.810 --> 00:17:48.690
to have a lower level of unemployment,
391
00:17:48.690 --> 00:17:50.900
and to do that, even if that means a slower
392
00:17:50.900 --> 00:17:54.630
rate of reduction of inflation over the next several years,
393
00:17:54.630 --> 00:17:59.180
or even if I judge his tonal quality,
394
00:17:59.180 --> 00:18:01.330
that it's desirable to do better
395
00:18:01.330 --> 00:18:04.700
even if that means accepting the present rate of inflation
396
00:18:04.700 --> 00:18:06.613
as a long run period of inflation.
397
00:18:10.490 --> 00:18:12.700
Well, now there's no disagreement on this score.
398
00:18:12.700 --> 00:18:15.720
It is highly desirable to do better if we can,
399
00:18:15.720 --> 00:18:17.290
it's highly desirable if we could,
400
00:18:17.290 --> 00:18:18.550
if there were some magic way
401
00:18:18.550 --> 00:18:21.310
by which we could have zero unemployment tomorrow
402
00:18:21.310 --> 00:18:23.350
and also zero inflation obviously,
403
00:18:23.350 --> 00:18:25.060
everybody would be in agreement.
404
00:18:25.060 --> 00:18:26.680
But Mr. Samuelson's point, of course,
405
00:18:26.680 --> 00:18:28.740
is not that trivial a point.
406
00:18:28.740 --> 00:18:30.367
He recognizes that you cannot do that,
407
00:18:30.367 --> 00:18:31.510
and his point is
408
00:18:34.780 --> 00:18:36.390
not only that he would prefer
409
00:18:36.390 --> 00:18:37.980
but he thinks the people would prefer
410
00:18:37.980 --> 00:18:41.550
and he thinks the political environment will demand
411
00:18:42.830 --> 00:18:47.790
a more rapid physical recovery than that,
412
00:18:47.790 --> 00:18:51.510
and that it will demand that even at the expense
413
00:18:51.510 --> 00:18:54.033
of a higher rate of price rise,
414
00:18:54.890 --> 00:18:56.853
here I am very much more uncertain,
415
00:18:58.660 --> 00:19:01.230
not that it would be desirable
416
00:19:01.230 --> 00:19:02.440
but that that is really
417
00:19:02.440 --> 00:19:04.290
what the public at large will demand.
418
00:19:05.940 --> 00:19:07.710
I think that on the whole,
419
00:19:07.710 --> 00:19:10.060
the public attitude depends very much more
420
00:19:10.060 --> 00:19:13.100
on whether unemployment is rising or falling
421
00:19:13.100 --> 00:19:15.150
than on the level of unemployment.
422
00:19:15.150 --> 00:19:18.380
I go back to earlier periods and note
423
00:19:18.380 --> 00:19:22.030
that from the period from 1961 to '64,
424
00:19:22.030 --> 00:19:24.300
it took four years for unemployment to get down
425
00:19:24.300 --> 00:19:29.300
from seven percent down to something about four percent,
426
00:19:31.080 --> 00:19:33.020
and for three of those four years,
427
00:19:33.020 --> 00:19:34.410
when the general attitude was
428
00:19:34.410 --> 00:19:36.710
that the economic conditions were pretty good,
429
00:19:36.710 --> 00:19:38.780
unemployment was averaging somewhere in the neighborhood
430
00:19:38.780 --> 00:19:41.180
of five percent during all of that period.
431
00:19:41.180 --> 00:19:43.860
The important thing was that it was trending down.
432
00:19:43.860 --> 00:19:48.200
I think also that there is a great deal of pressure
433
00:19:48.200 --> 00:19:50.632
on the side of getting rid of the inflation
434
00:19:50.632 --> 00:19:55.632
that this is not something that takes as low a range
435
00:19:56.300 --> 00:19:59.117
as is sometimes supposed,
436
00:19:59.117 --> 00:20:03.370
as low a priority in people's attitude as sometimes suppose,
437
00:20:03.370 --> 00:20:04.670
that there is a great desire
438
00:20:04.670 --> 00:20:06.150
on the part of the public at large
439
00:20:06.150 --> 00:20:08.030
to get inflation going down,
440
00:20:08.030 --> 00:20:10.430
that if they are told the facts that there is no way
441
00:20:10.430 --> 00:20:12.320
of slowing inflation,
442
00:20:12.320 --> 00:20:15.440
if you try at the same time to engineer a boom
443
00:20:15.440 --> 00:20:19.220
that we don't have any magic formula of incomes policy
444
00:20:19.220 --> 00:20:21.100
or any other magic formula
445
00:20:21.100 --> 00:20:22.780
which would enable us simultaneously
446
00:20:22.780 --> 00:20:25.150
to engineer a very rapid boom
447
00:20:25.150 --> 00:20:27.913
without restimulating inflation.
448
00:20:28.830 --> 00:20:32.130
The important point on this subject is,
449
00:20:32.130 --> 00:20:35.500
it seems to me, and this is the third point
450
00:20:35.500 --> 00:20:37.560
that Mr. Samuelson makes,
451
00:20:37.560 --> 00:20:40.560
he essentially implies that we know how to manage
452
00:20:40.560 --> 00:20:43.240
the monetary policy and monetary stock
453
00:20:43.240 --> 00:20:45.110
to achieve the objective
454
00:20:45.110 --> 00:20:47.430
of a faster reduction of unemployment
455
00:20:47.430 --> 00:20:49.940
without a long range rekindling of inflation.
456
00:20:49.940 --> 00:20:52.850
And this is a point where I fundamentally disagree with him
457
00:20:52.850 --> 00:20:57.290
because on this point, I do not believe we know how
458
00:20:59.680 --> 00:21:00.600
to do that.
459
00:21:02.990 --> 00:21:05.750
Implicit in his argument is that over a long period,
460
00:21:05.750 --> 00:21:08.710
there is a trade-off between inflation and unemployment,
461
00:21:08.710 --> 00:21:10.560
that over the next 10 years,
462
00:21:10.560 --> 00:21:12.010
it is possible for us
463
00:21:13.350 --> 00:21:16.030
to have a lower average level of unemployment
464
00:21:16.030 --> 00:21:20.170
at the cost of a higher level of inflation.
465
00:21:20.170 --> 00:21:22.670
I do not myself believe that to be the case,
466
00:21:22.670 --> 00:21:25.480
and I think our past experience leads us,
467
00:21:25.480 --> 00:21:28.130
gives us little reason to expect that it is the case.
468
00:21:30.960 --> 00:21:34.860
What you can do is to rearrange the unemployment over time.
469
00:21:34.860 --> 00:21:37.020
You undoubtedly could have a lower rate of unemployment
470
00:21:37.020 --> 00:21:38.500
over the next year or so
471
00:21:38.500 --> 00:21:40.910
by increasing the money stock very rapidly,
472
00:21:40.910 --> 00:21:43.990
but if you did, you would stimulate the inflation sharply.
473
00:21:43.990 --> 00:21:48.210
In that case, there would arise a great public clamor
474
00:21:48.210 --> 00:21:49.910
to do something about the inflation.
475
00:21:49.910 --> 00:21:51.260
You would step on the brake again,
476
00:21:51.260 --> 00:21:54.230
and you would, once again, go through the kind of episode
477
00:21:54.230 --> 00:21:55.420
we've been going through.
478
00:21:55.420 --> 00:21:57.950
You would, as it were, be throwing away completely
479
00:21:57.950 --> 00:21:59.280
the price we have already paid,
480
00:21:59.280 --> 00:22:02.480
as we did, as the Kennedy and Johnson administrations
481
00:22:02.480 --> 00:22:04.860
threw away the price that was paid
482
00:22:04.860 --> 00:22:08.260
from 1958 to '61 in the form of high unemployment
483
00:22:08.260 --> 00:22:11.400
in order to get a stable price pattern.
484
00:22:11.400 --> 00:22:13.810
So I do not believe there is any long run trade-off
485
00:22:13.810 --> 00:22:16.030
between inflation and unemployment.
486
00:22:16.030 --> 00:22:18.160
Now more importantly, I do not believe
487
00:22:18.160 --> 00:22:20.590
that we know how to manage the monetary stock
488
00:22:20.590 --> 00:22:23.270
in such a sensitive way as to achieve
489
00:22:23.270 --> 00:22:24.890
just that delicate balance.
490
00:22:24.890 --> 00:22:26.880
There may exist a path,
491
00:22:26.880 --> 00:22:30.040
which would lead you if you could do it sensitively enough
492
00:22:30.040 --> 00:22:33.260
to a somewhat more rapid amelioration of unemployment
493
00:22:33.260 --> 00:22:34.760
without starting an inflation.
494
00:22:34.760 --> 00:22:36.070
There may exist a better path
495
00:22:36.070 --> 00:22:37.520
than the one we're going to find.
496
00:22:37.520 --> 00:22:40.030
The question is if we know how to achieve it.
497
00:22:40.030 --> 00:22:42.407
And here, and this is my main point
498
00:22:42.407 --> 00:22:44.500
and the main reason why I have been in favor of
499
00:22:44.500 --> 00:22:46.870
a constant rate of growth of money,
500
00:22:46.870 --> 00:22:48.940
is because the record of history
501
00:22:48.940 --> 00:22:50.563
as I look back over the record.
502
00:22:51.420 --> 00:22:55.110
Here in the past, I look at what the Fed has done.
503
00:22:55.110 --> 00:22:58.010
The Fed has followed exactly the policy
504
00:22:58.010 --> 00:23:00.150
that Mr. Samuelson recommends.
505
00:23:00.150 --> 00:23:02.290
It has followed a policy
506
00:23:02.290 --> 00:23:05.030
of sometimes increasing the money supply more rapidly,
507
00:23:05.030 --> 00:23:07.350
sometimes increasing it less rapidly,
508
00:23:07.350 --> 00:23:10.670
with the aim of offsetting what it regarded
509
00:23:10.670 --> 00:23:12.980
as other forces making for instability.
510
00:23:12.980 --> 00:23:14.530
What has been the result?
511
00:23:14.530 --> 00:23:16.530
Well, I have examined in detail
512
00:23:16.530 --> 00:23:21.530
the record of history over the now nearly 60 years
513
00:23:21.900 --> 00:23:23.450
that the Fed has been in operation,
514
00:23:23.450 --> 00:23:25.830
and I have also examined the record for other countries
515
00:23:25.830 --> 00:23:27.860
and other central banks.
516
00:23:27.860 --> 00:23:30.070
I do not know of any example of any bank
517
00:23:30.070 --> 00:23:33.070
which has successfully been able to carry out such a policy.
518
00:23:33.904 --> 00:23:36.620
Because of the fact
519
00:23:36.620 --> 00:23:39.250
that what the monetary authorities do now
520
00:23:40.500 --> 00:23:43.963
have their effect six or nine or 12 or 14 months from now,
521
00:23:46.398 --> 00:23:48.470
a sensitive discretionary policy requires an ability
522
00:23:48.470 --> 00:23:50.710
to forecast a future that does not exist.
523
00:23:50.710 --> 00:23:52.790
It requires a confidence in those forecasts
524
00:23:52.790 --> 00:23:54.190
that does not exist.
525
00:23:54.190 --> 00:23:56.550
It requires an ability to lean against
526
00:23:56.550 --> 00:24:00.010
the prevailing winds that does not exist,
527
00:24:00.010 --> 00:24:01.510
the prevailing political wind.
528
00:24:02.820 --> 00:24:05.240
Mr. William McChesney Martin,
529
00:24:05.240 --> 00:24:06.430
when he was chairman of the Fed,
530
00:24:06.430 --> 00:24:09.050
was fond of talking about the Fed's policy
531
00:24:09.050 --> 00:24:11.300
as leaning against the wind.
532
00:24:11.300 --> 00:24:12.850
That's a good image.
533
00:24:12.850 --> 00:24:15.010
But if the Fed's policy is going to be successful,
534
00:24:15.010 --> 00:24:16.770
it must lean against tomorrow's wind
535
00:24:16.770 --> 00:24:19.710
when you don't know which way that wind will be blowing.
536
00:24:19.710 --> 00:24:22.180
If you go back and reconstruct the history of the past
537
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and take it month by month and year by year
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00:24:24.330 --> 00:24:25.950
and say, let us suppose,
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we hypothetically in our mind's eye
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00:24:28.720 --> 00:24:30.870
conceive of the Fed as following a policy
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of a steady rate of monetary growth over that period,
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00:24:33.260 --> 00:24:35.590
would that have been better or worse?
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00:24:35.590 --> 00:24:38.860
And the answer is, it seems to me absolutely clear
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and would be assented to by Mr. Samuelson
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in the retrospect of historical examination,
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00:24:44.940 --> 00:24:48.340
the following of a constant rate of monetary growth policy
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00:24:48.340 --> 00:24:51.020
would have avoided every single major mistake
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00:24:51.020 --> 00:24:52.000
of monetary policy.
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00:24:52.000 --> 00:24:54.860
It would have prevented the Great Depression of the 1930s,
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00:24:54.860 --> 00:24:56.780
it would have prevented the depression
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00:24:56.780 --> 00:25:00.810
of the 1937, '38 period,
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00:25:00.810 --> 00:25:03.100
it would more recently have prevented
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00:25:03.100 --> 00:25:08.100
the acceleration of inflation from '64 to '68.
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00:25:08.790 --> 00:25:13.770
And therefore, a policy of
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00:25:13.770 --> 00:25:15.410
a constant rate of monetary growth
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00:25:15.410 --> 00:25:16.880
is not a be all and end all,
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00:25:16.880 --> 00:25:18.720
it is not a perfect policy.
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00:25:18.720 --> 00:25:20.860
What I assert and what I am persuaded by
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00:25:20.860 --> 00:25:23.400
the evidence of history is that it would
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00:25:23.400 --> 00:25:26.610
avoid any major mistakes of monetary management,
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00:25:26.610 --> 00:25:29.370
and on the record of history, there is no evidence
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00:25:29.370 --> 00:25:31.070
that we know how to do better
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00:25:31.070 --> 00:25:36.070
given the political forces at play on the central bank.
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00:25:36.090 --> 00:25:38.090
In general, I have never argued
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00:25:38.090 --> 00:25:40.220
that a constant rate of monetary growth
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00:25:40.220 --> 00:25:43.100
is a be all and end all of all monetary policy.
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00:25:43.100 --> 00:25:46.640
Maybe as our monetary research continues,
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00:25:46.640 --> 00:25:50.620
we will be able to learn enough in greater detail
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00:25:50.620 --> 00:25:55.260
about the interrelationships to construct a formula,
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00:25:55.260 --> 00:25:59.930
a scheme, a guide, a more sensitive scheme or guide
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00:25:59.930 --> 00:26:01.280
that will do still better.
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00:26:01.280 --> 00:26:03.980
What I do say is that in the present state of our knowledge
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00:26:03.980 --> 00:26:06.197
or I should say ignorance,
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00:26:06.197 --> 00:26:08.941
the constant rate of monetary growth
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00:26:08.941 --> 00:26:11.300
will avoid major mistakes,
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00:26:11.300 --> 00:26:16.300
will provide a stable basis for a stable economy,
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00:26:16.480 --> 00:26:19.730
is a policy that can be understood by the public at large,
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00:26:19.730 --> 00:26:22.710
and is a policy that can be followed.
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00:26:22.710 --> 00:26:26.210
Whether we will have the political courage,
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00:26:26.210 --> 00:26:29.560
wisdom, and sense to maintain that policy
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00:26:29.560 --> 00:26:31.670
over the next few years is, of course, a gamble.
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00:26:31.670 --> 00:26:35.397
I am not prepared to set very high rates on it.
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00:26:35.397 --> 00:26:36.560
The evidence of the past is
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00:26:36.560 --> 00:26:39.240
that we do not have that courage.
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00:26:39.240 --> 00:26:44.240
However, the willingness of the Nixon administration
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00:26:44.330 --> 00:26:47.240
to maintain its policy in the face of so much criticism
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00:26:47.240 --> 00:26:48.740
over the past year and a half,
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00:26:49.640 --> 00:26:54.480
the maturity, judgment, and courage of Arthur Burns
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00:26:54.480 --> 00:26:56.583
as chairman of the Federal Reserve Bank
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00:26:56.583 --> 00:26:59.929
and his willingness to maintain a firm policy
591
00:26:59.929 --> 00:27:02.340
makes it at least a gambling proposition
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00:27:02.340 --> 00:27:04.500
that we'll be able to stick to this policy,
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00:27:04.500 --> 00:27:07.260
get rid of this inflation once and for all,
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and go on to a long run policy
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of stable, non-inflationary growth.
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Thank you very much Professor Friedman.
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Remember subscribers, if you have any questions or comments
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00:27:17.750 --> 00:27:21.160
for topics you would like to hear discussed in this series,
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00:27:21.160 --> 00:27:24.300
please send them to Instructional Dynamics Incorporated,
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00:27:24.300 --> 00:27:28.547
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00:27:30.210 --> 00:27:33.243
Dr. Friedman will be visiting with you again in two weeks.