WEBVTT
1
00:00:02.130 --> 00:00:04.170
Instructional Dynamics Incorporated
2
00:00:04.170 --> 00:00:06.610
welcomes you to this weekly series of commentaries
3
00:00:06.610 --> 00:00:08.580
on the current economic scene.
4
00:00:08.580 --> 00:00:09.440
Reporting to you,
5
00:00:09.440 --> 00:00:11.670
will be one of the nations leading economists
6
00:00:11.670 --> 00:00:13.060
Professor Milton Friedman,
7
00:00:13.060 --> 00:00:14.783
of the University of Chicago.
8
00:00:16.140 --> 00:00:18.216
Dr. Friedman, to begin this discussion
9
00:00:18.216 --> 00:00:22.040
we have a letter from one of our subscribers
10
00:00:22.040 --> 00:00:25.040
who's asked you to comment on the possibility that gold
11
00:00:25.040 --> 00:00:27.010
might be revalued upward.
12
00:00:27.010 --> 00:00:28.223
What is your opinion?
13
00:00:29.200 --> 00:00:32.620
Currently, there are two prices for gold
14
00:00:32.620 --> 00:00:34.170
formally speaking.
15
00:00:34.170 --> 00:00:36.800
One price is the price in the free market in London,
16
00:00:36.800 --> 00:00:38.090
that's a free market price
17
00:00:38.090 --> 00:00:40.090
and there's no point in talking about
18
00:00:40.090 --> 00:00:41.790
whether it's going to be revalued or not,
19
00:00:41.790 --> 00:00:44.770
it will be determined by market purchases and sales.
20
00:00:44.770 --> 00:00:48.010
The other is the so-called official price of $35 an ounce,
21
00:00:48.010 --> 00:00:50.106
the second tier of the two tier system
22
00:00:50.106 --> 00:00:52.776
established last spring.
23
00:00:52.776 --> 00:00:56.090
The question I take it refers to the second tier,
24
00:00:56.090 --> 00:00:59.500
to the formal official price of $35 an ounce.
25
00:00:59.500 --> 00:01:02.100
I think that there is very little chance indeed
26
00:01:02.100 --> 00:01:06.290
that that price will be raised by the United States
27
00:01:06.290 --> 00:01:07.610
in this coming 12 months
28
00:01:07.610 --> 00:01:10.760
or indeed in several more years after that.
29
00:01:10.760 --> 00:01:12.240
I think I may say,
30
00:01:12.240 --> 00:01:16.330
that it would be a major mistake to raise the price.
31
00:01:16.330 --> 00:01:19.800
That price of $35 an ounce is, at the moment,
32
00:01:19.800 --> 00:01:23.020
a pure formality it has very little meaning.
33
00:01:23.020 --> 00:01:25.960
According to the agreement reached last spring,
34
00:01:25.960 --> 00:01:29.900
it was understood that the trades between central banks
35
00:01:29.900 --> 00:01:33.210
would be carried on at that $35 an ounce price,
36
00:01:33.210 --> 00:01:34.043
that is to say,
37
00:01:34.043 --> 00:01:36.680
if the central bank of Germany wanted to turn in dollars
38
00:01:36.680 --> 00:01:38.030
we, technically speaking,
39
00:01:38.030 --> 00:01:41.170
are committed to giving them dollars at $35 an ounce.
40
00:01:41.170 --> 00:01:42.003
I'm sorry,
41
00:01:42.003 --> 00:01:44.870
giving them gold for their dollars at $35 an ounce.
42
00:01:44.870 --> 00:01:49.200
But although this is the understanding on paper,
43
00:01:49.200 --> 00:01:51.470
in fact what you really have
44
00:01:51.470 --> 00:01:56.470
is a situation in which gold is no longer really convertible
45
00:01:56.810 --> 00:01:59.420
on demand by anybody.
46
00:01:59.420 --> 00:02:04.420
If the treasury is asked to exchange $20 million,
47
00:02:04.557 --> 00:02:07.410
$10 million, $30 million for one country
48
00:02:07.410 --> 00:02:09.502
or another I have no doubt they will do so.
49
00:02:09.502 --> 00:02:12.360
What I think everybody understands,
50
00:02:12.360 --> 00:02:14.782
the Germans, the French, the Italians, the British
51
00:02:14.782 --> 00:02:16.251
and all the rest.
52
00:02:16.251 --> 00:02:18.360
That a request for a conversion
53
00:02:18.360 --> 00:02:20.490
of a very large sum of dollars,
54
00:02:20.490 --> 00:02:23.127
for example if one of these countries were to come and say,
55
00:02:23.127 --> 00:02:24.190
"We have $500 million
56
00:02:24.190 --> 00:02:26.171
"that we would like to convert into gold."
57
00:02:26.171 --> 00:02:29.760
I think it is perfectly clear to everybody involved,
58
00:02:29.760 --> 00:02:31.277
that the answer the treasury would be,
59
00:02:31.277 --> 00:02:34.137
"Sorry boys, no so,
60
00:02:34.137 --> 00:02:36.437
"that's not a demand for monetary purposes
61
00:02:36.437 --> 00:02:39.760
"and we are not going to contribute to speculation in gold."
62
00:02:39.760 --> 00:02:41.300
So that the fact of the matter is,
63
00:02:41.300 --> 00:02:43.010
if you look beneath the surface,
64
00:02:43.010 --> 00:02:47.404
that we now have defacto, non-convertibility of gold
65
00:02:47.404 --> 00:02:50.070
or of dollars into gold I should say,
66
00:02:50.070 --> 00:02:52.330
non-convertibility of dollars into gold,
67
00:02:52.330 --> 00:02:55.790
not only so far as private people are concerned,
68
00:02:55.790 --> 00:02:58.610
so far as official central banks,
69
00:02:58.610 --> 00:03:00.820
government treasuries and so on,
70
00:03:00.820 --> 00:03:02.250
that's not a bad situation.
71
00:03:02.250 --> 00:03:04.330
In fact, I have for long been in favor
72
00:03:04.330 --> 00:03:07.250
of allowing gold to be a free market commodity,
73
00:03:07.250 --> 00:03:08.690
with its price determined by
74
00:03:08.690 --> 00:03:10.810
private purchases and sales.
75
00:03:10.810 --> 00:03:12.550
Nothing is less important to this country
76
00:03:12.550 --> 00:03:15.320
than what the price of gold is in London,
77
00:03:15.320 --> 00:03:19.930
it is foolish for us to make large sacrifices
78
00:03:19.930 --> 00:03:21.650
or engage in large measures
79
00:03:21.650 --> 00:03:23.352
in order to try to keep the price of gold
80
00:03:23.352 --> 00:03:25.790
one thing rather than another.
81
00:03:25.790 --> 00:03:29.260
So that, not only does that seem desirable
82
00:03:29.260 --> 00:03:31.420
but I think it is very unlikely
83
00:03:31.420 --> 00:03:36.420
that any administration would feel it desirable
84
00:03:36.550 --> 00:03:38.203
to raise the price of gold.
85
00:03:38.203 --> 00:03:39.491
(mumbles)
86
00:03:39.491 --> 00:03:44.281
Whether it be a Republican or Democratic administration,
87
00:03:44.281 --> 00:03:48.543
it is politically very difficult to say
88
00:03:48.543 --> 00:03:50.190
that we should raise the price of gold
89
00:03:50.190 --> 00:03:52.730
when the main beneficiaries of that would be
90
00:03:52.730 --> 00:03:54.150
South Africa and Russia,
91
00:03:54.150 --> 00:03:57.180
two countries with whom the people of this country
92
00:03:57.180 --> 00:03:58.500
feel about as little sympathy
93
00:03:58.500 --> 00:04:00.550
as they do with any other countries.
94
00:04:00.550 --> 00:04:02.420
And also, the speculators.
95
00:04:02.420 --> 00:04:05.060
This last point needs a little more emphasis.
96
00:04:05.060 --> 00:04:07.750
In the great gold rush of last fall,
97
00:04:07.750 --> 00:04:09.940
we sold several billion dollars worth of gold.
98
00:04:09.940 --> 00:04:12.590
We sold that gold at $35 an ounce.
99
00:04:12.590 --> 00:04:15.977
It seems to me almost intolerable, politically, to say,
100
00:04:15.977 --> 00:04:18.997
"We are now going to buy back at $70 an ounce,
101
00:04:18.997 --> 00:04:21.411
"gold that we sold at $35 an ounce."
102
00:04:21.411 --> 00:04:26.411
All of these political problems would be as nothing
103
00:04:26.430 --> 00:04:28.800
if economic forces required or demanded
104
00:04:28.800 --> 00:04:30.180
a rise in the price of gold.
105
00:04:30.180 --> 00:04:32.790
Now economic forces do require and demand
106
00:04:32.790 --> 00:04:34.610
a rise in the free market price of gold
107
00:04:34.610 --> 00:04:36.600
and the price of gold in London.
108
00:04:36.600 --> 00:04:39.180
But there is no economic force whatsoever
109
00:04:39.180 --> 00:04:42.320
that requires the US to change the official price of gold
110
00:04:42.320 --> 00:04:43.610
or that requires the US
111
00:04:43.610 --> 00:04:47.030
to engage in pegging the price of gold at any level.
112
00:04:47.030 --> 00:04:48.920
And thus, I think both on political grounds
113
00:04:48.920 --> 00:04:50.090
and on economic grounds,
114
00:04:50.090 --> 00:04:54.113
the chance of a US revaluation of gold is very small indeed.
115
00:04:55.030 --> 00:04:57.500
Well wouldn't a revaluation
116
00:04:57.500 --> 00:04:59.470
of the price of gold by the United States,
117
00:04:59.470 --> 00:05:02.270
in effect, be devaluing the dollar?
118
00:05:02.270 --> 00:05:03.811
The term devaluation of the dollar
119
00:05:03.811 --> 00:05:06.280
is a complex one.
120
00:05:06.280 --> 00:05:07.840
It would be devaluing the dollar
121
00:05:07.840 --> 00:05:09.920
in terms of one sense of that term,
122
00:05:09.920 --> 00:05:12.650
in terms of the price of gold in terms of the dollar.
123
00:05:12.650 --> 00:05:14.830
However, if the US raised the price of gold,
124
00:05:14.830 --> 00:05:16.531
let's suppose we raised it, to take an extreme case,
125
00:05:16.531 --> 00:05:19.660
from $35 to $70, doubled it.
126
00:05:19.660 --> 00:05:21.912
If Britain also doubled the price of gold,
127
00:05:21.912 --> 00:05:24.040
if Germany doubled the price of gold,
128
00:05:24.040 --> 00:05:26.240
if France doubled the price of gold,
129
00:05:26.240 --> 00:05:29.030
then no exchange rates would be changed
130
00:05:29.030 --> 00:05:32.650
and the price of the dollar in terms of the Pound Sterling,
131
00:05:32.650 --> 00:05:34.560
in terms of the Franc, in terms of the Mark,
132
00:05:34.560 --> 00:05:36.050
would remain the same.
133
00:05:36.050 --> 00:05:38.130
Hence, a sharp distinction must be made
134
00:05:38.130 --> 00:05:40.340
between a general rise in the price of gold
135
00:05:40.340 --> 00:05:42.290
on the part of all countries involved
136
00:05:42.290 --> 00:05:43.700
and a rise in the price of gold
137
00:05:43.700 --> 00:05:45.690
only on the part of some countries.
138
00:05:45.690 --> 00:05:48.410
When Britain devalued a year ago,
139
00:05:48.410 --> 00:05:52.010
this involved raising the Pound Sterling price of gold
140
00:05:52.010 --> 00:05:55.000
but also changing the price of the Pound Sterling
141
00:05:55.000 --> 00:05:55.890
in terms of the dollar.
142
00:05:55.890 --> 00:05:58.163
It went from $2.80 to $2.40.
143
00:05:59.090 --> 00:06:01.730
In the present uproar in Europe what is being talked about
144
00:06:01.730 --> 00:06:03.469
is a devaluation of the Franc,
145
00:06:03.469 --> 00:06:07.550
which would mean a change of the official price of gold
146
00:06:07.550 --> 00:06:08.870
in terms of the Franc,
147
00:06:08.870 --> 00:06:11.410
but more important, a change in the exchange rates.
148
00:06:11.410 --> 00:06:13.539
In this second sense of devaluation,
149
00:06:13.539 --> 00:06:16.640
you could have devaluation,
150
00:06:16.640 --> 00:06:18.280
the United States exchange rates
151
00:06:18.280 --> 00:06:20.100
could change compared to some other countries,
152
00:06:20.100 --> 00:06:22.633
with or without a change in the price of gold.
153
00:06:23.510 --> 00:06:24.343
And Dr. Friedman,
154
00:06:24.343 --> 00:06:26.260
you've mentioned the current turmoil in Europe
155
00:06:26.260 --> 00:06:28.230
perhaps you could into more detail about that.
156
00:06:28.230 --> 00:06:31.560
What's really happening in France and in West Germany?
157
00:06:31.560 --> 00:06:33.429
That is a fascinating episode,
158
00:06:33.429 --> 00:06:37.470
France of course has been on the verge of difficulties
159
00:06:37.470 --> 00:06:38.470
ever since last May,
160
00:06:38.470 --> 00:06:40.560
when there were the great social,
161
00:06:40.560 --> 00:06:42.430
political, economic difficulties.
162
00:06:42.430 --> 00:06:45.610
These difficulties were resolved by measures
163
00:06:45.610 --> 00:06:47.490
which were widely believe to presage
164
00:06:47.490 --> 00:06:50.168
a very sharp rise in prices and wages in France
165
00:06:50.168 --> 00:06:53.010
and therefore made holders of French currency
166
00:06:53.010 --> 00:06:58.010
anxious to exchange French currency for other currencies.
167
00:06:58.280 --> 00:07:00.610
This was really an extraordinary event
168
00:07:00.610 --> 00:07:02.560
which had far reaching implications
169
00:07:02.560 --> 00:07:04.320
because France had seemed to be
170
00:07:04.320 --> 00:07:05.900
one of the hardest currencies in the world.
171
00:07:05.900 --> 00:07:08.670
Here was General De Gaulle on top of his great pile of gold
172
00:07:08.670 --> 00:07:10.970
yelling about financial discipline
173
00:07:10.970 --> 00:07:13.530
and about how sound money should rule.
174
00:07:13.530 --> 00:07:15.029
And all of a sudden overnight,
175
00:07:15.029 --> 00:07:18.100
that pile of gold is undermined by a few students
176
00:07:18.100 --> 00:07:20.029
who go on strike at the Sorbonne,
177
00:07:20.029 --> 00:07:22.429
joined later by some workers,
178
00:07:22.429 --> 00:07:26.810
then France topples from a position of a hard money,
179
00:07:26.810 --> 00:07:29.970
to a position of a money in danger.
180
00:07:29.970 --> 00:07:31.210
This, I may say,
181
00:07:31.210 --> 00:07:34.970
this situation was reinforced a few months ago
182
00:07:34.970 --> 00:07:37.370
when Russia invaded Czechoslovakia.
183
00:07:37.370 --> 00:07:39.909
The reason it was reinforced was because
184
00:07:39.909 --> 00:07:42.808
already the French episode had led
185
00:07:42.808 --> 00:07:45.087
speculators of the world to say to themselves,
186
00:07:45.087 --> 00:07:45.920
"My god,
187
00:07:45.920 --> 00:07:48.567
"here's a country which seemed to have such a hard currency
188
00:07:48.567 --> 00:07:50.790
"and overnight it can go on to become a soft currency.
189
00:07:50.790 --> 00:07:53.567
"Maybe we shouldn't be so happy about the German Mark,
190
00:07:53.567 --> 00:07:55.253
"it's a very strong currency,
191
00:07:56.604 --> 00:07:58.177
"but maybe the German Mark"
192
00:07:58.177 --> 00:08:00.090
"could overnight be weak currency."
193
00:08:00.090 --> 00:08:01.810
And then along came Czechoslovakia
194
00:08:01.810 --> 00:08:03.368
with the threats that you might have
195
00:08:03.368 --> 00:08:06.410
West Germany involved in war,
196
00:08:06.410 --> 00:08:10.070
or at least in political difficulties.
197
00:08:10.070 --> 00:08:12.350
Then this caused speculators worldwide
198
00:08:12.350 --> 00:08:14.560
to wonder about the German Mark.
199
00:08:14.560 --> 00:08:19.560
But now, you have all the turmoil that's going on there,
200
00:08:19.620 --> 00:08:21.460
the most interesting feature of that turmoil,
201
00:08:21.460 --> 00:08:23.820
is that it doesn't seem yet to have affected the dollar.
202
00:08:23.820 --> 00:08:24.793
Now why?
203
00:08:24.793 --> 00:08:27.280
Well I think the answer is very straightforward.
204
00:08:27.280 --> 00:08:31.770
The papers talk loosely about people running on money,
205
00:08:31.770 --> 00:08:34.050
or people trying to get out of currencies,
206
00:08:34.050 --> 00:08:36.130
or flight from the dollar.
207
00:08:36.130 --> 00:08:37.750
In order to fly from a currency,
208
00:08:37.750 --> 00:08:40.000
you have to fly into something.
209
00:08:40.000 --> 00:08:42.400
The crucial question you must ask yourself,
210
00:08:42.400 --> 00:08:45.200
is if you're a holder of one currency,
211
00:08:45.200 --> 00:08:47.820
what other currency would you prefer to hold?
212
00:08:47.820 --> 00:08:50.960
Now if you're going to hold one of the European currencies,
213
00:08:50.960 --> 00:08:52.930
then at the moment,
214
00:08:52.930 --> 00:08:56.040
it clearly seems far more sensible for you
215
00:08:56.040 --> 00:08:59.290
to hold the German Mark which is a very strong currency
216
00:08:59.290 --> 00:09:00.900
than to hold the French Franc
217
00:09:00.900 --> 00:09:02.480
which appears to be a very weak currency,
218
00:09:02.480 --> 00:09:03.600
or to hold the Swiss Franc
219
00:09:03.600 --> 00:09:06.800
rather than the British Pound let's say.
220
00:09:06.800 --> 00:09:08.070
But suppose you ask yourself,
221
00:09:08.070 --> 00:09:09.928
I've got dollars,
222
00:09:09.928 --> 00:09:12.420
would I be wise to put those dollars
223
00:09:12.420 --> 00:09:14.560
into a European currency?
224
00:09:14.560 --> 00:09:18.650
Then the dollar holders in this world are at the moment
225
00:09:18.650 --> 00:09:20.010
faced with a dilemma.
226
00:09:20.010 --> 00:09:23.040
They may be very leery of the US economy,
227
00:09:23.040 --> 00:09:24.900
they may think we're engaged in inflation,
228
00:09:24.900 --> 00:09:28.580
they may be worried about the dollar's safety in that sense.
229
00:09:28.580 --> 00:09:30.850
But they have no place to go, they're stuck,
230
00:09:30.850 --> 00:09:33.540
since the French turmoil,
231
00:09:33.540 --> 00:09:35.730
since the Czechoslovakia invasion,
232
00:09:35.730 --> 00:09:38.250
if they ask themselves where shall I go?
233
00:09:38.250 --> 00:09:41.410
It seems like going from the frying pan to the fryer
234
00:09:41.410 --> 00:09:43.920
to convert dollars even into Marks.
235
00:09:43.920 --> 00:09:45.710
You might do a little of it.
236
00:09:45.710 --> 00:09:47.720
This has been from the point of view
237
00:09:47.720 --> 00:09:49.670
of the US balance of payments,
238
00:09:49.670 --> 00:09:52.800
a very fortunate or unfortunate turn of affairs,
239
00:09:52.800 --> 00:09:54.980
depending on how you look at it.
240
00:09:54.980 --> 00:09:56.530
It was fortunate in the sense
241
00:09:56.530 --> 00:09:58.648
that it is a major factor that underlies
242
00:09:58.648 --> 00:10:03.648
the deceptive, current balance of payments figures.
243
00:10:03.900 --> 00:10:06.190
These balance of payments figures for the third quarter
244
00:10:06.190 --> 00:10:07.390
show a slight surplus,
245
00:10:07.390 --> 00:10:10.859
but that surplus is entirely due to a capital movement
246
00:10:10.859 --> 00:10:13.270
which involves this kind of a transfer
247
00:10:13.270 --> 00:10:16.190
of funds from Europe to the United States.
248
00:10:16.190 --> 00:10:17.740
Incidentally, I should go back and say,
249
00:10:17.740 --> 00:10:18.573
you might say,
250
00:10:18.573 --> 00:10:20.147
"Well if he's going to get out of the dollar,
251
00:10:20.147 --> 00:10:22.050
"he might get into gold."
252
00:10:22.050 --> 00:10:23.730
But that raises the price of gold
253
00:10:23.730 --> 00:10:25.630
but doesn't get rid of any dollars,
254
00:10:25.630 --> 00:10:27.530
it just means somebody else holds the dollars.
255
00:10:27.530 --> 00:10:28.637
The person who sold the gold.
256
00:10:28.637 --> 00:10:30.850
And now you have to ask what will he do with the dollars
257
00:10:30.850 --> 00:10:32.190
and you're back to where you were before
258
00:10:32.190 --> 00:10:34.240
which is why I left gold out of the picture
259
00:10:34.240 --> 00:10:36.310
when I was talking about it that way.
260
00:10:36.310 --> 00:10:38.219
Well to come back then,
261
00:10:38.219 --> 00:10:41.510
here you are, it looks as if the speculators of the world
262
00:10:41.510 --> 00:10:42.530
have no place else to go,
263
00:10:42.530 --> 00:10:44.740
and as a result the weakness in the Franc
264
00:10:44.740 --> 00:10:49.160
and the turmoil in Europe has not communicated itself
265
00:10:49.160 --> 00:10:51.050
to any attempt to get out of gold.
266
00:10:51.050 --> 00:10:51.883
As I already said,
267
00:10:51.883 --> 00:10:54.880
that made the balance of payments figures look very strong.
268
00:10:54.880 --> 00:10:56.030
That may seem fortunate,
269
00:10:56.030 --> 00:10:58.690
personally I think it's a very unfortunate development,
270
00:10:58.690 --> 00:11:00.030
because our basic underlying
271
00:11:00.030 --> 00:11:04.780
balance of payments situation is not necessarily strong.
272
00:11:04.780 --> 00:11:06.520
It would've been far better for this country
273
00:11:06.520 --> 00:11:08.630
if we had had a financial crisis
274
00:11:08.630 --> 00:11:09.890
like Europe is now having,
275
00:11:09.890 --> 00:11:12.328
in this country, in the world this summer.
276
00:11:12.328 --> 00:11:15.819
That would have forced us to do the sensible thing,
277
00:11:15.819 --> 00:11:17.540
which I'll come back to later,
278
00:11:17.540 --> 00:11:19.050
but the sensible thing in my opinion
279
00:11:19.050 --> 00:11:21.808
would be to let the dollar go free,
280
00:11:21.808 --> 00:11:25.520
let its price be determined in the open market
281
00:11:25.520 --> 00:11:26.550
just as I earlier suggested
282
00:11:26.550 --> 00:11:30.033
that the price of gold should go free.
283
00:11:32.770 --> 00:11:33.603
Well Dr. Friedman,
284
00:11:33.603 --> 00:11:36.130
getting back to West Germany just for a moment,
285
00:11:36.130 --> 00:11:38.270
just the other day the bond government
286
00:11:38.270 --> 00:11:41.410
decided against revaluing the Mark upward.
287
00:11:41.410 --> 00:11:43.070
What is this going to do?
288
00:11:43.070 --> 00:11:44.660
Well the German government
289
00:11:44.660 --> 00:11:47.860
has not decided against revaluing the Mark upward,
290
00:11:47.860 --> 00:11:52.100
they have decided not to do it in an open and obvious way.
291
00:11:52.100 --> 00:11:57.100
The fact is that the pressure of economic forces in Europe
292
00:11:59.180 --> 00:12:00.540
leave very little alternative.
293
00:12:00.540 --> 00:12:02.060
Something has to be done
294
00:12:02.060 --> 00:12:04.650
to alter the relative values of the Mark and the Franc.
295
00:12:04.650 --> 00:12:06.843
Under present circumstances the fact is,
296
00:12:06.843 --> 00:12:09.547
that the Franc is too expensive in terms of other currencies
297
00:12:09.547 --> 00:12:10.990
and the Mark is too cheap.
298
00:12:10.990 --> 00:12:14.168
And as a result you have this steady pressure on the Franc
299
00:12:14.168 --> 00:12:16.800
in favor of the Mark.
300
00:12:16.800 --> 00:12:21.800
Now, what the Germans have done is a rather ingenious thing,
301
00:12:21.810 --> 00:12:24.410
they have in effect,
302
00:12:24.410 --> 00:12:27.440
said they are going to revalue the Mark.
303
00:12:27.440 --> 00:12:28.460
Raise its value.
304
00:12:28.460 --> 00:12:29.820
But they're not going to call it that,
305
00:12:29.820 --> 00:12:31.530
they're going to do it in an indirect way.
306
00:12:31.530 --> 00:12:33.160
Let me explain.
307
00:12:33.160 --> 00:12:36.060
Suppose you consider the problem of trade alone,
308
00:12:36.060 --> 00:12:39.010
purchases and sales of imports and exports.
309
00:12:39.010 --> 00:12:44.010
Then a 10% upward valuation of the Mark,
310
00:12:44.480 --> 00:12:46.350
which means changing the price of the Mark
311
00:12:46.350 --> 00:12:51.350
from $0.25 a Mark to $0.275 a Mark,
312
00:12:51.380 --> 00:12:53.379
is absolutely identical in its effect
313
00:12:53.379 --> 00:12:56.400
with a more complicated set of things,
314
00:12:56.400 --> 00:13:01.400
namely, imposing a 10% tax on imports into Germany
315
00:13:02.490 --> 00:13:06.680
and giving a 10% subsidy to exports out of Germany.
316
00:13:06.680 --> 00:13:09.300
Now let me show why that's exactly the same thing.
317
00:13:09.300 --> 00:13:11.310
Consider a German,
318
00:13:11.310 --> 00:13:15.979
a German now for four Marks can buy something worth a dollar
319
00:13:15.979 --> 00:13:20.013
if the Mark cost $0.28,
320
00:13:21.869 --> 00:13:25.820
for four Marks he would be able to buy something
321
00:13:25.820 --> 00:13:29.300
costing a dollar, I should say $0.275,
322
00:13:29.300 --> 00:13:31.910
he would be able to buy something costing $1.10
323
00:13:31.910 --> 00:13:34.460
that is for his four Marks he would then get $1.10.
324
00:13:35.520 --> 00:13:36.550
This means
325
00:13:36.550 --> 00:13:38.978
that American goods become more attractive to him,
326
00:13:38.978 --> 00:13:43.060
before he command over $1 worth of American goods,
327
00:13:43.060 --> 00:13:46.020
now he has command over $1.10 of American goods
328
00:13:46.020 --> 00:13:47.926
that's why an upward valuation of the Mark
329
00:13:47.926 --> 00:13:51.010
would increase imports into Germany.
330
00:13:51.010 --> 00:13:51.920
Looked at the other way
331
00:13:51.920 --> 00:13:54.067
from the point of view of the American,
332
00:13:54.067 --> 00:13:56.333
at $0.25 a Mark,
333
00:13:57.480 --> 00:14:01.060
he has to pay $1 to buy something that costs four Marks.
334
00:14:01.060 --> 00:14:03.560
At $0.275 a Mark,
335
00:14:03.560 --> 00:14:08.560
he has to pay $1.10 to buy that same item,
336
00:14:13.310 --> 00:14:14.420
which costs four Marks.
337
00:14:14.420 --> 00:14:17.550
And therefore, he is discouraged from buying German goods.
338
00:14:17.550 --> 00:14:19.130
So an upward valuation of the Mark,
339
00:14:19.130 --> 00:14:21.767
raising its price from $0.25 to $0.275
340
00:14:21.767 --> 00:14:23.860
will encourage imports into Germany
341
00:14:23.860 --> 00:14:26.170
and discourage exports from Germany.
342
00:14:26.170 --> 00:14:27.407
Now consider the following,
343
00:14:27.407 --> 00:14:31.380
consider a case where the German government
344
00:14:31.380 --> 00:14:33.337
instead of doing this,
345
00:14:33.337 --> 00:14:35.700
give us a subsidy on imports.
346
00:14:35.700 --> 00:14:37.540
I think I spoke before backward,
347
00:14:37.540 --> 00:14:40.050
I think I said a tax on imports and a subsidy on exports,
348
00:14:40.050 --> 00:14:42.020
that's equivalent to a devaluation.
349
00:14:42.020 --> 00:14:45.630
I should have said a subsidy on imports and a tax on exports
350
00:14:45.630 --> 00:14:47.860
that's the equivalent to an upward revaluation.
351
00:14:47.860 --> 00:14:49.028
Take the same case.
352
00:14:49.028 --> 00:14:52.310
The German government leaves the price of the Mark at $0.25,
353
00:14:52.310 --> 00:14:53.300
but it says to anybody
354
00:14:53.300 --> 00:14:55.097
who imports goods from the United States,
355
00:14:55.097 --> 00:15:00.097
"For every Mark you spend,
356
00:15:00.297 --> 00:15:05.187
"we will give you an extra 10% of that Mark (mumbles)
357
00:15:05.187 --> 00:15:06.790
"as a subsidy."
358
00:15:06.790 --> 00:15:07.988
Now the Germans,
359
00:15:07.988 --> 00:15:10.670
if they use four Marks they get a dollar
360
00:15:10.670 --> 00:15:14.110
in addition they get a government subsidy of 10% or $1.10,
361
00:15:14.110 --> 00:15:18.470
so an importer of US goods can again import exactly $1.10
362
00:15:18.470 --> 00:15:20.070
he's in identically the same position
363
00:15:20.070 --> 00:15:23.420
as if the Mark had been revalued upward by 10%.
364
00:15:23.420 --> 00:15:25.547
Now, let's suppose the government now says,
365
00:15:25.547 --> 00:15:29.039
"We're gonna impose a tax of 10% on exports."
366
00:15:29.039 --> 00:15:30.348
Well, then again,
367
00:15:30.348 --> 00:15:34.719
the American who before with $1 could buy four Marks,
368
00:15:34.719 --> 00:15:39.610
now it will take him $1.10 to buy that same amount of goods.
369
00:15:39.610 --> 00:15:41.060
Because in addition to the four Marks,
370
00:15:41.060 --> 00:15:42.880
he has to pay the 10% tax.
371
00:15:42.880 --> 00:15:46.420
So, so far as purchases and sales are concerned,
372
00:15:46.420 --> 00:15:51.300
a 10% subsidy on imports and a 10% tax on exports
373
00:15:51.300 --> 00:15:54.240
is identical with a 10% upward valuation.
374
00:15:54.240 --> 00:15:55.840
Now, in order to get this right,
375
00:15:55.840 --> 00:15:57.750
we gotta look at what the German government is really doing.
376
00:15:57.750 --> 00:16:00.409
They aren't doing it even quite that open.
377
00:16:00.409 --> 00:16:02.840
What has been happening,
378
00:16:02.840 --> 00:16:05.930
is that they have something called a value added tax.
379
00:16:05.930 --> 00:16:08.590
And they have been rebating this value added tax
380
00:16:08.590 --> 00:16:10.970
of 11% on exports,
381
00:16:10.970 --> 00:16:13.220
and they have been imposing it on imports.
382
00:16:13.220 --> 00:16:15.100
So they've been putting a tax on imports
383
00:16:15.100 --> 00:16:17.050
and as it were, giving a subsidy to exports.
384
00:16:17.050 --> 00:16:18.560
Now what they propose to do,
385
00:16:18.560 --> 00:16:21.340
is to reduce both that tax and subsidy.
386
00:16:21.340 --> 00:16:22.908
They're not gonna go the whole way,
387
00:16:22.908 --> 00:16:25.950
as of this stage of talking
388
00:16:25.950 --> 00:16:27.440
I don't know how far they're going to go,
389
00:16:27.440 --> 00:16:29.240
I haven't seen the precise detail
390
00:16:29.240 --> 00:16:30.937
but suppose they cut that in half.
391
00:16:30.937 --> 00:16:32.599
Then that means,
392
00:16:32.599 --> 00:16:37.360
that instead of there being a tax of 11% on imports
393
00:16:37.360 --> 00:16:39.279
there will be tax of only 5.5%,
394
00:16:39.279 --> 00:16:41.920
that's equivalent to giving a subsidy to imports,
395
00:16:41.920 --> 00:16:43.360
that encourages imports.
396
00:16:43.360 --> 00:16:47.000
Instead of there being a rebate of 11.5% on exports
397
00:16:47.000 --> 00:16:49.510
there will be rebate of only 5.5%,
398
00:16:49.510 --> 00:16:53.920
that's equivalent to imposing a 5.5% tax on exports.
399
00:16:53.920 --> 00:16:56.210
So if they were to cut this value added treatment
400
00:16:56.210 --> 00:16:57.400
precisely in half,
401
00:16:57.400 --> 00:16:59.300
that is economically equivalent,
402
00:16:59.300 --> 00:17:02.430
so far as purchases and sales are concerned,
403
00:17:02.430 --> 00:17:06.228
to a revaluation of the Mark by exactly 5.5%.
404
00:17:06.228 --> 00:17:09.480
Why do it this very complicated and roundabout way,
405
00:17:09.480 --> 00:17:11.380
instead of straight out and open and above board?
406
00:17:11.380 --> 00:17:12.840
There are two reasons.
407
00:17:12.840 --> 00:17:15.800
One is pure human reason of saving face,
408
00:17:15.800 --> 00:17:17.850
they have said over and over and over again
409
00:17:17.850 --> 00:17:19.440
that they will not revalue the Mark
410
00:17:19.440 --> 00:17:20.820
and they hate to admit that they're gonna do it
411
00:17:20.820 --> 00:17:22.010
when they said they weren't.
412
00:17:22.010 --> 00:17:24.548
But there is a substantive reason beyond that.
413
00:17:24.548 --> 00:17:27.100
This arrangement is perfectly equivalent
414
00:17:27.100 --> 00:17:29.396
with respect to all imports and exports,
415
00:17:29.396 --> 00:17:31.490
so long as its maintained in effect,
416
00:17:31.490 --> 00:17:33.700
it will be equivalent with respect to future,
417
00:17:33.700 --> 00:17:36.480
actual physical capital movements investments in Germany,
418
00:17:36.480 --> 00:17:39.010
because, in so far as those require imports,
419
00:17:39.010 --> 00:17:40.860
they will get the benefit of lower tax,
420
00:17:40.860 --> 00:17:42.360
in so far as they produce exports,
421
00:17:42.360 --> 00:17:46.810
they will get the lower subsidy.
422
00:17:46.810 --> 00:17:49.430
But consider the people who bought Marks
423
00:17:49.430 --> 00:17:53.100
in the hope a formal revaluation of the Mark.
424
00:17:53.100 --> 00:17:55.490
This is indirect and concealed revaluation
425
00:17:55.490 --> 00:17:57.230
will give them no profits.
426
00:17:57.230 --> 00:17:58.490
They will get nothing out of it.
427
00:17:58.490 --> 00:18:01.130
Because they changed money for money,
428
00:18:01.130 --> 00:18:03.380
they took Francs and converted it into Marks
429
00:18:03.380 --> 00:18:05.240
and the price of the Franc in terms of the Mark
430
00:18:05.240 --> 00:18:06.800
on this step will not be changed.
431
00:18:06.800 --> 00:18:08.900
So if this method works,
432
00:18:08.900 --> 00:18:13.240
it will have the effect on trade movements of a revaluation,
433
00:18:13.240 --> 00:18:17.770
but at the same time it will not reward the people
434
00:18:17.770 --> 00:18:19.840
who speculated in favor of the Mark.
435
00:18:19.840 --> 00:18:20.673
So in other words,
436
00:18:20.673 --> 00:18:22.460
the spectators might get burned a bit?
437
00:18:22.460 --> 00:18:23.700
They won't get burned,
438
00:18:23.700 --> 00:18:26.590
the difficulty with our present system of currencies
439
00:18:26.590 --> 00:18:28.180
which have fixed exchange rates,
440
00:18:28.180 --> 00:18:32.540
and the reason why you have these big speculative movements,
441
00:18:32.540 --> 00:18:34.530
is because it costs you nothing to speculate
442
00:18:34.530 --> 00:18:36.391
with a government guarantee of a price,
443
00:18:36.391 --> 00:18:38.680
everybody knows that the German Mark
444
00:18:38.680 --> 00:18:41.560
isn't gonna go down in price, it isn't gonna be devalued
445
00:18:41.560 --> 00:18:43.560
and therefore, it's a free ride.
446
00:18:43.560 --> 00:18:45.750
Indeed, one of the things that always strikes me
447
00:18:45.750 --> 00:18:49.390
as so terribly amusing under these circumstances,
448
00:18:49.390 --> 00:18:50.690
is that people like myself,
449
00:18:50.690 --> 00:18:52.330
will for many many years have been arguing
450
00:18:52.330 --> 00:18:53.200
that what you ought to have
451
00:18:53.200 --> 00:18:55.330
is a free market in exchange rates,
452
00:18:55.330 --> 00:18:56.957
are always being met with the argument,
453
00:18:56.957 --> 00:18:58.117
"Oh that would be terrible,
454
00:18:58.117 --> 00:19:00.430
"that would introduce uncertainty into the market."
455
00:19:00.430 --> 00:19:02.100
And then the result of the fixed rates,
456
00:19:02.100 --> 00:19:04.130
is that you have things like
457
00:19:04.130 --> 00:19:07.360
the Pound Sterling crisis of a year ago,
458
00:19:07.360 --> 00:19:09.840
like the French-German situation now,
459
00:19:09.840 --> 00:19:11.370
I suppose this isn't uncertainty,
460
00:19:11.370 --> 00:19:12.681
this is something else,
461
00:19:12.681 --> 00:19:15.321
so it seems to me kind of amusing
462
00:19:15.321 --> 00:19:20.321
that you should adopt in the name of certainty,
463
00:19:22.090 --> 00:19:23.720
in the name of assuredness,
464
00:19:23.720 --> 00:19:25.001
you should adopt a system
465
00:19:25.001 --> 00:19:29.480
which maximizes the extent of destabilizing speculation.
466
00:19:29.480 --> 00:19:31.530
Because it imposes no cost on it.
467
00:19:31.530 --> 00:19:34.663
See let's suppose you had a free exchange rate now.
468
00:19:35.610 --> 00:19:37.630
As speculators at the very beginning
469
00:19:37.630 --> 00:19:40.390
started to leave the Franc and go to the Mark,
470
00:19:40.390 --> 00:19:42.120
that would've driven up the price of the Mark
471
00:19:42.120 --> 00:19:43.540
in terms of the Frank.
472
00:19:43.540 --> 00:19:45.220
Under those circumstances,
473
00:19:45.220 --> 00:19:46.880
speculators would've been deterred,
474
00:19:46.880 --> 00:19:49.390
they at least would take a chance at a loss later on
475
00:19:49.390 --> 00:19:51.440
if the Mark price came down.
476
00:19:51.440 --> 00:19:54.010
But when you have government guarantee
477
00:19:54.010 --> 00:19:55.100
that the price of the Mark
478
00:19:55.100 --> 00:19:57.000
in terms of the Franc will be fixed,
479
00:19:57.000 --> 00:19:58.700
you have a one way deal.
480
00:19:58.700 --> 00:20:00.870
The most you can lose is your transaction cost,
481
00:20:00.870 --> 00:20:02.890
there is a little cost of buying and selling.
482
00:20:02.890 --> 00:20:04.970
But beyond that you cannot lose a great deal
483
00:20:04.970 --> 00:20:06.660
because the German government, in effect,
484
00:20:06.660 --> 00:20:08.913
guarantees you a bottom price.
485
00:20:10.020 --> 00:20:11.540
With this turmoil
486
00:20:11.540 --> 00:20:13.831
between the Franc and the Mark
487
00:20:13.831 --> 00:20:16.820
in the current economic news,
488
00:20:16.820 --> 00:20:20.400
what is all this going to mean to President-elect Nixon
489
00:20:20.400 --> 00:20:21.233
when he takes over,
490
00:20:21.233 --> 00:20:24.100
as far as our balance of payments is concerned?
491
00:20:24.100 --> 00:20:27.033
That is a very very complicated issue,
492
00:20:28.410 --> 00:20:31.273
and I am not completely certain how to answer that.
493
00:20:32.609 --> 00:20:37.410
These kinds of eruptions,
494
00:20:37.410 --> 00:20:39.590
have a tendency of suddenly springing up
495
00:20:39.590 --> 00:20:41.459
and then dying down again.
496
00:20:41.459 --> 00:20:44.910
If indeed the Franc is not devalued,
497
00:20:44.910 --> 00:20:49.729
if this German concealed revaluation suffices to bring
498
00:20:49.729 --> 00:20:52.870
some measure of equality into the balance of payments
499
00:20:52.870 --> 00:20:55.160
between France and Germany and other countries,
500
00:20:55.160 --> 00:20:57.230
well then the whole thing may die down again.
501
00:20:57.230 --> 00:21:00.050
But that's a very optimistic picture.
502
00:21:00.050 --> 00:21:01.320
I think the odds are
503
00:21:01.320 --> 00:21:04.940
that the Franc will sooner or later be devalued,
504
00:21:04.940 --> 00:21:07.750
regardless of what President De Gaulle
505
00:21:07.750 --> 00:21:08.970
or his premier may say.
506
00:21:08.970 --> 00:21:10.610
Now that's not a certainty,
507
00:21:10.610 --> 00:21:12.970
De Gaulle has been willing to take very strong measures
508
00:21:12.970 --> 00:21:15.990
and take very extreme measures in order to defend the Franc
509
00:21:15.990 --> 00:21:18.990
and he may be able to pull this chestnut out of the fire,
510
00:21:18.990 --> 00:21:21.751
but it's a difficult chestnut to pull out.
511
00:21:21.751 --> 00:21:25.010
In the mean time there will be continued turmoil
512
00:21:25.010 --> 00:21:27.170
within the European money market
513
00:21:27.170 --> 00:21:29.270
as between the Franc and other currencies.
514
00:21:30.220 --> 00:21:31.920
When the devaluation occurs,
515
00:21:31.920 --> 00:21:33.740
even that may not solve the problem
516
00:21:33.740 --> 00:21:35.740
look at the case of the Pound Sterling,
517
00:21:35.740 --> 00:21:37.610
it devalued a year ago
518
00:21:37.610 --> 00:21:39.890
and now it is again in difficulty
519
00:21:39.890 --> 00:21:42.270
and it's been involved in this recent mixture.
520
00:21:42.270 --> 00:21:45.470
So it's not clear that the thing will settle down.
521
00:21:45.470 --> 00:21:47.900
But so far as the United States is concerned,
522
00:21:47.900 --> 00:21:50.150
the circumstance I mentioned before
523
00:21:50.150 --> 00:21:51.770
of the fact that holders of dollars
524
00:21:51.770 --> 00:21:53.980
have almost no place to go,
525
00:21:53.980 --> 00:21:58.980
gives President-elect Nixon a wider range of options
526
00:21:59.900 --> 00:22:01.330
than he otherwise would have.
527
00:22:01.330 --> 00:22:04.580
Because I think that there is a very very good chance
528
00:22:04.580 --> 00:22:08.120
that no crisis will emerge with respect to the dollar
529
00:22:08.120 --> 00:22:09.690
in the next few months.
530
00:22:09.690 --> 00:22:11.610
As I say, from my own personal point of view,
531
00:22:11.610 --> 00:22:13.059
not speaking for him at all, on the contrary,
532
00:22:13.059 --> 00:22:15.540
I think this is a bad thing.
533
00:22:15.540 --> 00:22:16.430
I think a crisis
534
00:22:16.430 --> 00:22:20.210
which produces a right resolution of our problem
535
00:22:20.210 --> 00:22:21.043
would be a good thing,
536
00:22:21.043 --> 00:22:22.310
we'd get it over with quick
537
00:22:22.310 --> 00:22:23.143
and we'd be through.
538
00:22:23.143 --> 00:22:24.620
I think the gold panic last year
539
00:22:24.620 --> 00:22:26.780
was splendid from this point of view,
540
00:22:26.780 --> 00:22:30.770
it forced us to let the price of gold go on a free market
541
00:22:30.770 --> 00:22:32.650
as we should've done out of our own volition earlier,
542
00:22:32.650 --> 00:22:34.610
then you know there's been almost no talk
543
00:22:34.610 --> 00:22:37.350
about gold speculation since then.
544
00:22:37.350 --> 00:22:42.350
So Mr Nixon will have a wide range of options open to him,
545
00:22:45.241 --> 00:22:47.350
I can speak very easily of which one I'd like him to take
546
00:22:47.350 --> 00:22:48.680
but as to which one he will,
547
00:22:48.680 --> 00:22:49.930
that's a more difficult question
548
00:22:49.930 --> 00:22:52.630
and I'll have to leave it for the moment unanswered.
549
00:22:52.630 --> 00:22:55.110
Thank you very much Dr Milton Friedman.
550
00:22:55.110 --> 00:22:58.410
If you have questions or comments or suggestions or topics
551
00:22:58.410 --> 00:23:00.280
you would like discussed in this series,
552
00:23:00.280 --> 00:23:03.650
please send them to Instructional Dynamics Incorporated,
553
00:23:03.650 --> 00:23:08.613
166 East Superior Street, Chicago, Illinois 60611.