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- | Hello, Instructional Dynamics Incorporated welcomes you | 0:02 |
to this weekly series of commentaries | 0:05 | |
on the current economic scene. | 0:07 | |
Reporting to you will be | 0:09 | |
one of the nation's leading economists, | 0:10 | |
Professor Milton Friedman of the University of Chicago. | 0:12 | |
- | I'd like to start today by first briefly | 0:15 |
continuing the dialogue with my respected old friend | 0:20 | |
and frequent opponent, Paul Samuelson, | 0:24 | |
about eclecticism, fiscal policy, and monetary effects. | 0:27 | |
I feel like saying, as is often said in books, | 0:33 | |
for those who aren't interested in this, | 0:38 | |
skip to the next chapter, but I shall try to be brief. | 0:40 | |
I'm delighted that this dialogue has led Paul | 0:48 | |
to look up some numbers and discover | 0:50 | |
that there is no sure-fire formula | 0:52 | |
for predicting changes in GNP for monetary changes. | 0:55 | |
As I indicated several weeks ago in my tape | 0:58 | |
discussing the debate that I had with Walter Heller, | 1:00 | |
I am very far indeed from arguing | 1:05 | |
that there is such a precise relationship, | 1:07 | |
there is a lot of noise in the relationship, | 1:09 | |
but it is precisely because there is | 1:12 | |
that I am in favor of the rule | 1:14 | |
increasing the quantity of money by a steady rate | 1:17 | |
rather than trying to manipulate the quantity of money | 1:20 | |
very delicately to produce fine tuning in the economy. | 1:23 | |
Unfortunately or fortunately, there is no way | 1:29 | |
in which simply by looking at the quantity of money | 1:33 | |
you can make a precise prediction | 1:35 | |
of what's going to happen to the quantity, | 1:36 | |
to GNP or other magnitudes, | 1:39 | |
in the next quarter, or two quarters later, | 1:41 | |
or three quarters later. | 1:43 | |
You may be able to do better that way | 1:44 | |
than you can most other ways, | 1:46 | |
but that's still very far from perfect. | 1:47 | |
Apparently I did not make myself clear | 1:50 | |
and Paul misunderstood what the thrust of my comment was. | 1:52 | |
Paul had quoted the slight slowdown in the rate | 1:56 | |
of growth of GNP in the third quarter of this year | 1:59 | |
as evidence that fiscal policy was starting | 2:02 | |
to exert its effect, that the increase in the surtax | 2:05 | |
had exercised a dampening influence | 2:10 | |
on the rate of growth of the national economy. | 2:12 | |
It was this statement that I was referring to. | 2:17 | |
The point of my remark was that that slowdown | 2:20 | |
was not relevant evidence, was not valid evidence, | 2:23 | |
that fiscal policy was indeed having an effect | 2:28 | |
since the slowdown in the GNP could equally well | 2:31 | |
have been explained by monetary factors alone. | 2:33 | |
I did not mean to suggest that monetary factors alone | 2:37 | |
did explain the slowdown, I did not mean to say | 2:40 | |
that fiscal policy was from this one case alone | 2:44 | |
proved to be ineffective, that would be silly, | 2:47 | |
one swallow doesn't make a spring, | 2:51 | |
you need a good deal of evidence. | 2:53 | |
All I was saying was that this case was no evidence | 2:55 | |
in that direction, since monetary policy could have | 2:57 | |
or monetary changes could have explained the slowdown. | 3:00 | |
It may be that fiscal policy does have an effect | 3:04 | |
on the growth of GNP, though I believe as I stated earlier, | 3:08 | |
that the evidence to date is against it. | 3:12 | |
But if one is to demonstrate that fiscal policy | 3:15 | |
has an effect one needs much more persuasive evidence | 3:19 | |
than this particular slowdown. | 3:22 | |
But let me turn now from this interesting intramural debate | 3:24 | |
which I may say while it is academic | 3:30 | |
in the very best sense of the term, | 3:33 | |
is also far from academic in the bad sense of that term. | 3:35 | |
It has very great importance for governmental policy | 3:38 | |
as well as the conduct of private affairs. | 3:41 | |
Let me turn however from that topic | 3:45 | |
to the events of the recent period. | 3:47 | |
Clearly the most interesting event of this period | 3:53 | |
has been the international financial crisis | 3:55 | |
and its aftermath. | 3:57 | |
As I mentioned in my last tape, | 4:00 | |
in many ways the really important thing about this crisis | 4:03 | |
is that the U.S. was hardly involved, | 4:06 | |
or rather I should say the U.S. dollar | 4:12 | |
was hardly involved, it was an intra-European crisis | 4:14 | |
among European currencies. | 4:17 | |
If such a crisis had blown up a year ago, | 4:19 | |
there is little doubt that it would have | 4:21 | |
affected the dollar. | 4:26 | |
The fact that it did not this time | 4:30 | |
is strong evidence for the point I was making | 4:32 | |
in my last tape, namely that the uncertainties | 4:35 | |
in France in May last year, this year, | 4:39 | |
and the Russian invasion of Czechoslovakia | 4:41 | |
has changed drastically the attitude | 4:43 | |
of holders of capital throughout the world | 4:45 | |
toward the dollar. | 4:49 | |
It has rendered almost impossible | 4:51 | |
a private run on the dollar. | 4:53 | |
The dramatic development in the crisis | 4:58 | |
was de Gaulle's apparently one man decision | 5:01 | |
to hold the franc at its prior value | 5:05 | |
and not devalue. | 5:08 | |
Apparently it was believed by all and sundry | 5:10 | |
that agreement had been reached among the central bankers | 5:15 | |
and ministers of finance who had been meeting for three days | 5:20 | |
that the franc would be devalued, | 5:24 | |
and indeed according to the talk that came out | 5:26 | |
the only real question was by how much. | 5:28 | |
It was believed that a condition | 5:31 | |
of a grant of a two billion dollar credit to France | 5:33 | |
was that the franc be devalued | 5:37 | |
but that it not be devalued by so large an amount | 5:40 | |
that it would produce great difficulties | 5:43 | |
for the pound sterling. | 5:45 | |
Perhaps commentators are only repeating | 5:48 | |
the discussion of a year ago when sterling was in crisis, | 5:50 | |
the international bankers at that time | 5:54 | |
attached as a condition to their loan to sterling | 5:56 | |
a mild devaluation of sterling, as a result | 5:58 | |
sterling has been in difficulty ever since. | 6:02 | |
As a footnote, it might be worth noting | 6:04 | |
that this is a distinct change from most postwar experience. | 6:07 | |
In most of the postwar episodes | 6:10 | |
when a devaluation occurred, the devaluation was larger | 6:12 | |
than was strictly needed. | 6:16 | |
This was a case in the earlier pound devaluation to 80, | 6:18 | |
it was a case when de Gaulle devalued the franc | 6:22 | |
in 1958 shortly on coming into office. | 6:25 | |
One effect of devaluing too much | 6:28 | |
is to give some margin for error, some leeway, | 6:31 | |
and to permit thereafter a favorable balance | 6:34 | |
of payments which would allow reserves | 6:36 | |
to be accumulated. | 6:38 | |
It was the over-devaluation by de Gaulle in 1958 | 6:39 | |
which enabled him to accumulate the large stockpile | 6:42 | |
of gold and dollars that gave him | 6:46 | |
so much political strength in the following years. | 6:48 | |
But this time, the international bankers | 6:51 | |
were determined to prevent Britain, a year ago, | 6:54 | |
from going too far, and so they attached | 6:57 | |
as a condition to their loan, that the devaluation | 6:58 | |
be limited, the rumor at that time | 7:01 | |
was that the maximum that was acceptable was 15% | 7:04 | |
and Britain almost went that far. | 7:07 | |
Similarly this time it was said | 7:09 | |
that the central bankers were very much | 7:11 | |
disposed to limit the French devaluation | 7:17 | |
to somewhere within the range of 10 to 15%. | 7:20 | |
But de Gaulle fooled them all by | 7:25 | |
deciding that he was gonna stick | 7:29 | |
to the existing rate for the franc. | 7:30 | |
He has been widely criticized for doing this | 7:33 | |
but I must admit that I am inclined rather | 7:36 | |
to be on his side. | 7:38 | |
If you are going to have a fixed exchange rate, | 7:40 | |
you better have it fixed. | 7:42 | |
If you make frequent adjustments in the level | 7:43 | |
at which you peg it, at which you fix the exchange rate, | 7:46 | |
the effect of this is simply to invite | 7:50 | |
widespread destabilizing speculation. | 7:52 | |
It may be that de Gaulle did this for wrong reasons, | 7:54 | |
he did it for reasons of pride and arrogance, | 7:58 | |
all that may be, I know nothing about that, | 8:00 | |
but it would not be the first time | 8:04 | |
that the right decision was reached for the wrong reasons. | 8:06 | |
If you look at the situation from an economic | 8:10 | |
point of view, and for the moment | 8:12 | |
put political considerations aside, | 8:14 | |
de Gaulle had three basic alternatives. | 8:16 | |
First, he had the alternative he followed | 8:19 | |
to hold the rate, and try by internal measures | 8:22 | |
to adjust internal policies so that the internal value | 8:24 | |
of the franc would correspond to its external value. | 8:27 | |
Second, he could have devalued by a fixed amount, | 8:30 | |
shifted the price of the franc | 8:33 | |
from its existing level to a new pegged level, | 8:36 | |
this was the measure that most people thought | 8:39 | |
he was going to take. | 8:44 | |
Third, he could have floated the franc, | 8:45 | |
that is to say, he could have said | 8:48 | |
we cannot hold the present price | 8:53 | |
of the franc, or we do not choose to. | 8:54 | |
We do not want to simply repeat our past policy | 8:56 | |
of going to a new level that we will get stuck on, | 9:01 | |
we will simply let the franc find its own level | 9:03 | |
in the free market, and whatever price | 9:06 | |
people want to buy and sell francs for | 9:08 | |
in terms of foreign currencies. | 9:10 | |
This is what Canada did in 1950 | 9:12 | |
when it had exchange problems. | 9:15 | |
At the time it did it offered the excuse | 9:17 | |
that it was going to allow the Canadian dollar | 9:20 | |
to float temporarily because it did not know | 9:24 | |
what the right price for the dollar was. | 9:27 | |
It expressed the view that as it floated | 9:30 | |
the market would enable a better determination | 9:32 | |
to be made of the new price. | 9:36 | |
It was on this ground that the International Monetary Fund | 9:38 | |
approved the Canadian shift to a floating rate, | 9:40 | |
regarding it as a transitional device to a new parity. | 9:43 | |
As it happened that transition lasted some 12 years | 9:49 | |
and it was terminated, not because Canada found | 9:53 | |
the right price for the dollar, | 9:56 | |
but rather because the Canadian government | 9:58 | |
embarked on an ill-advised policy of speculation | 10:01 | |
in the Canadian dollar that started it going down, | 10:05 | |
and it found no way of getting off of the tiger | 10:07 | |
it had jumped on, except to shift, to re-peg | 10:10 | |
the Canadian dollar at a new rate. | 10:16 | |
Well similarly in this occasion, | 10:19 | |
General de Gaulle could very well have economically said | 10:22 | |
that he was floating the franc | 10:27 | |
either in order to find out by experience | 10:28 | |
what the right level was | 10:31 | |
or because he was just going to let it | 10:32 | |
find its own level indefinitely. | 10:34 | |
I may say that in my opinion this third course, | 10:38 | |
floating the franc, would have been by far and away, | 10:41 | |
the best policy for him to have followed | 10:43 | |
in terms of his own interests, and the interests of France, | 10:45 | |
and also I may say in terms of the interests | 10:48 | |
of the world financial system. | 10:50 | |
Floating the franc would have made it unnecessary | 10:55 | |
for him to take the widespread measures | 10:59 | |
of direct exchange control that he has adopted, | 11:01 | |
it would have made it unnecessary for him | 11:04 | |
to engage in the other measures | 11:06 | |
many of which are undesirable on domestic grounds | 11:08 | |
that he has been forced to take. | 11:11 | |
Of course it's not all one way. | 11:14 | |
Some of the measures he has taken on domestic grounds | 11:16 | |
are very desirable in and of themselves. | 11:19 | |
However, whatever might have been | 11:22 | |
the abstract desirability of floating the franc, | 11:24 | |
this was largely ruled out so far as France was concerned | 11:29 | |
by de Gaulle's own past rhetoric. | 11:32 | |
He has for years been preaching the doctrine | 11:35 | |
that we need a real gold standard | 11:37 | |
rather than our present gold exchange standard. | 11:40 | |
He has been preaching the doctrine | 11:43 | |
that we need a world of fixed exchange rates | 11:44 | |
but exchange rates that are held fixed | 11:47 | |
by the literal transfer of gold | 11:53 | |
to settle balance of payments deficits. | 11:54 | |
Given this rhetoric, it would have been | 11:58 | |
very, very difficult indeed for him | 12:00 | |
to have floated the franc. | 12:02 | |
In addition to his own rhetoric, floating the franc | 12:06 | |
was largely ruled out by the universal disapproval | 12:09 | |
of floating rates by central bankers, | 12:12 | |
that is to say, by the people who would have been | 12:14 | |
advising de Gaulle. | 12:16 | |
de Gaulle is obviously not a great economist on his own, | 12:17 | |
he must act in accordance with the advice he gets. | 12:20 | |
He is known to place great reliance on the advice | 12:23 | |
of Jacques Rueff, who is an extremely sophisticated | 12:26 | |
and subtle person in financial matters, | 12:28 | |
the man who was largely responsible for the measures | 12:32 | |
which de Gaulle took in 1958 on the financial side | 12:37 | |
and which were so spectacularly successful. | 12:40 | |
Rueff would almost surely have been opposed | 12:43 | |
to floating rates and so would most | 12:46 | |
of the other central bankers. | 12:47 | |
I may come back in a moment as to why | 12:50 | |
they are so opposed and to why in my opinion | 12:53 | |
they are wrong in being opposed. | 12:55 | |
But to continue with the French story, | 12:57 | |
as between the two alternatives | 12:59 | |
that he regarded as really open to him, | 13:01 | |
holding the rate fixed and devaluing to a new level, | 13:04 | |
there are two major advantages in sticking | 13:09 | |
to the present rate, rather than going to a new peg. | 13:12 | |
First, it gives de Gaulle a political basis | 13:19 | |
from which he can justify and get public support | 13:24 | |
for internal disinflationary measures. | 13:27 | |
It's very hard it seems to me to rally such support | 13:32 | |
for measures in order to protect the franc at a lower rate. | 13:35 | |
After all, if 10% devaluation is okay, | 13:38 | |
why not a 20% devaluation? | 13:43 | |
Why not a large enough devaluation | 13:46 | |
so you don't have to take these unpleasant measures? | 13:47 | |
On the other hand, the argument that the franc | 13:51 | |
must be held at a rate which it has been held at | 13:55 | |
for over 10 years now that this is a way | 13:58 | |
to get a permanent, stable value for the franc, | 14:03 | |
that in order to do this the country must | 14:07 | |
gird its loins and all the other usual rhetoric, | 14:09 | |
that seems to me a much stronger position | 14:12 | |
for a politician to stand on. | 14:15 | |
As I've already mentioned, many of these measures | 14:19 | |
he took for this purpose are undesirable, | 14:21 | |
particularly the measures involving control | 14:23 | |
of foreign exchange, but some of the others, | 14:25 | |
particularly those involving cuts in government budgets, | 14:27 | |
and lower rate of monetary expansion, | 14:30 | |
and in general a less inflationary internal policy, | 14:33 | |
seem to be highly desirable for internal | 14:35 | |
as well as external reasons. | 14:37 | |
The second reason why holding to the present rate | 14:39 | |
is preferable in my opinion to devaluing | 14:42 | |
is that it is likely to have more favorable effects | 14:45 | |
in the future. | 14:48 | |
If a country, every year, or two years, or three years | 14:50 | |
is known to resort to devaluations | 14:54 | |
and not to hesitate to do so, | 14:57 | |
this lessens greatly the assistance which that country | 14:59 | |
will get from speculators. | 15:04 | |
Now that may be putting it backward, | 15:07 | |
I ought to say it increases greatly | 15:09 | |
the extent to which speculators will make it difficult | 15:11 | |
for the country to hold any one | 15:13 | |
of those intervening steps. | 15:16 | |
Every time there is a slight uncertainty | 15:18 | |
about the balance of payment situation, | 15:21 | |
speculators remember what happened before | 15:24 | |
and they say well, this country is not afraid | 15:29 | |
to devalue, we've got our place set. | 15:31 | |
Let me not give any misimpression, | 15:34 | |
I'm not criticizing speculators, | 15:38 | |
on the contrary, I think they perform | 15:39 | |
an extremely useful function, that it is very desirable | 15:41 | |
that there be some trigger mechanism | 15:45 | |
which will signal to the public at large | 15:47 | |
difficulties in the balance of payment situation, | 15:49 | |
rather than simply leave a false sense of security | 15:52 | |
which will encourage the government to go much too far | 15:56 | |
in the policies that are producing the problems. | 15:58 | |
But, if you're going to have the speculators | 16:01 | |
contribute as much as possible to the stability, | 16:04 | |
you don't want them to set them off on all sorts | 16:07 | |
of false alarms. | 16:09 | |
Yet, once a country gets a reputation for devaluing | 16:11 | |
under the slightest of provocations, | 16:14 | |
of course that's not quite the French case, | 16:17 | |
but it's worth exaggerating to make the point, | 16:19 | |
why then every minor tremor is likely | 16:23 | |
to set off a wave of speculation. | 16:26 | |
We have already seen this happen. | 16:28 | |
One of the striking things about the success | 16:31 | |
of international currency crises of the past year or two | 16:33 | |
is how rapidly people all over the world | 16:37 | |
have learned the possibilities of speculation. | 16:41 | |
The people who speculate are not only those | 16:43 | |
you might call professional speculators | 16:45 | |
but businessmen of every variety and description | 16:47 | |
who have occasion to deal in different currencies, | 16:49 | |
have learned, and whenever rumors get around | 16:52 | |
or there are signs that currency might be devalued, | 16:55 | |
you'd better take some steps to in order to assure yourself | 16:58 | |
that you will not be caught in the currency | 17:02 | |
that is likely to be devalued. | 17:04 | |
Hence, if de Gaulle can carry through | 17:09 | |
his present policy, if he can make | 17:12 | |
the old exchange parity stick, he will give speculators | 17:16 | |
a second thought the next time difficulties arise | 17:22 | |
and you will have a less extreme | 17:25 | |
and less rapid speculative movement of funds out of France. | 17:27 | |
Question of course, the $64 question of course, | 17:32 | |
is whether de Gaulle will in fact be able | 17:35 | |
to make his decisions stick. | 17:36 | |
Here the initial indications are favorable. | 17:39 | |
The crucial time is the first couple of days | 17:44 | |
after such an announcement. | 17:47 | |
In those first couple of days the franc seems to have held | 17:48 | |
and there seems not to have been a renewal | 17:51 | |
of a major flight out of the franc. | 17:53 | |
If you can get past that initial period | 17:55 | |
then from a short run point of view | 17:57 | |
there tends to be a great reverse flow of francs | 17:58 | |
to support the franc. | 18:02 | |
That is to say you have all of the people | 18:03 | |
who sold the franc short, or who converted | 18:05 | |
francs that they own into other currencies, | 18:08 | |
in the hope that there was going to be | 18:11 | |
or fear or expectation that there was going to be | 18:14 | |
a devaluation, now there has not been a devaluation. | 18:16 | |
They are typically in the habit of holding those funds | 18:20 | |
in francs, they will therefore tend | 18:24 | |
to repatriate their funds and this will tend | 18:26 | |
to make the franc look fairly good. | 18:28 | |
The question is, for how long | 18:31 | |
will these favorable indications hold? | 18:33 | |
That's a much harder question to answer | 18:36 | |
because that depends critically | 18:38 | |
on how successful France is internally | 18:40 | |
in making the disinflationary policies take hold, | 18:43 | |
how successful it is in raising the internal value | 18:46 | |
of the franc and making it match | 18:49 | |
the external value of the franc, | 18:51 | |
so I have no firm answer, it's highly possible | 18:55 | |
that even though the present measure holds, | 18:58 | |
long about next March or April or May | 19:02 | |
you may have another franc crisis. | 19:04 | |
Spring up, we will have to see what happens | 19:05 | |
inside France before we can have | 19:08 | |
much of a judgment on that. | 19:10 | |
However in my opinion in many ways | 19:12 | |
a more difficult question, although it is one | 19:14 | |
that has hardly been spoken of, | 19:16 | |
and has received very much less attention, | 19:18 | |
is whether Germany will be able to hold | 19:20 | |
to its policy of keeping the present rate | 19:23 | |
for the mark unchanged, except for the implicit revaluation | 19:27 | |
involved in the changes in the taxes and subsidies | 19:33 | |
on imports and exports. | 19:41 | |
Those changes which I discussed in my last tape | 19:43 | |
have turned out in the event | 19:45 | |
to be even smaller than I was contemplating then, | 19:46 | |
even various experts estimate that they are equivalent | 19:51 | |
to perhaps a three or four percent revaluation of the mark. | 19:54 | |
That would seem to be a much too small | 19:59 | |
a revaluation of the mark to cut Germany's present | 20:01 | |
balance of payment surplus. | 20:05 | |
As one reads all of the discussion | 20:07 | |
about the present economic crisis, you might suppose | 20:09 | |
that Germany is benefiting from its large | 20:12 | |
foreign exchange surplus, | 20:17 | |
that revaluation of the mark would hurt Germany, | 20:19 | |
that if Germany is forced to revalue the mark | 20:23 | |
it will be a sacrifice on the part of Germany | 20:26 | |
for the benefit of other countries. | 20:28 | |
This however is the old, old, mercantilist fallacy. | 20:30 | |
It really is exactly the same argument | 20:34 | |
as was widespread in the 18th and 17th centuries, | 20:36 | |
which justified protective policies | 20:41 | |
on the grounds of what a nation had to do | 20:43 | |
was to accumulate gold and silver treasure, | 20:45 | |
that exports were wonderful and imports were terrible. | 20:47 | |
The fact is, it is in Germany's own interest | 20:52 | |
to have a mark valued at a level at which | 20:56 | |
its surplus is drastically cut down. | 20:59 | |
Holding the mark at its present level | 21:05 | |
without internal inflation, will mean | 21:09 | |
that Germany is paying a very high price. | 21:13 | |
Let's look at what that price is. | 21:17 | |
If it holds the mark at its present level | 21:20 | |
and it also succeeds in avoiding inflation internally, | 21:22 | |
then Germany will continue to have a very large surplus | 21:25 | |
in its balance of payment account. | 21:28 | |
What does that mean? | 21:30 | |
That means, put very crudely, | 21:32 | |
that it exports a great deal more than it imports, | 21:34 | |
a great deal more in value terms. | 21:37 | |
But that in effect means that Germany gets to use | 21:39 | |
for domestic purposes, a smaller fraction | 21:41 | |
of its current output. | 21:44 | |
For every hundred units of output | 21:46 | |
it gets to consume at home or add to domestic capital | 21:49 | |
a smaller fraction of that than it would | 21:53 | |
if it were not accumulating a surplus of dollars | 21:56 | |
or of other currencies. | 22:01 | |
In effect, Germany is accumulating capital | 22:04 | |
by making foreign loans to the extent of its surplus. | 22:07 | |
Now it might be that Germany | 22:11 | |
would want to make foreign loans | 22:13 | |
and insofar as it desires to make foreign loans | 22:15 | |
those are voluntary foreign investments, | 22:17 | |
they are made because people believe the rate of return | 22:20 | |
on those is higher than the rate of return | 22:22 | |
on internal investments and that's fine. | 22:24 | |
But insofar as it is accumulating let us say | 22:28 | |
dollar assets in the form of dollars | 22:31 | |
that people turn into the German central bank | 22:36 | |
for marks, because at the present price of the mark | 22:39 | |
they prefer the mark to the dollar, | 22:41 | |
insofar as it is involuntarily accumulating | 22:43 | |
these foreign assets, it is in effect | 22:46 | |
making loans to foreign countries | 22:48 | |
which are less advantageous than the investments | 22:50 | |
it could make at home. | 22:53 | |
Indeed, insofar as it holds the funds that come in | 22:56 | |
in the form of dollars proper, | 23:02 | |
in the form of non-interest bearing dollars, | 23:04 | |
either currency or demand deposits at commercial banks | 23:07 | |
or federal reserve banks in the United States, | 23:11 | |
Germany is making an interest-free loan | 23:14 | |
to the U.S., I speak of the U.S., | 23:18 | |
but exactly the same thing is true | 23:20 | |
insofar if Germany accumulates francs, or lire, or pounds, | 23:22 | |
in each of those cases it is making | 23:26 | |
an interest-free loan to the country in question. | 23:27 | |
In respect to all of these issues, | 23:30 | |
it seems to me that the best way | 23:33 | |
to get a sensible perspective on them | 23:35 | |
is always to try to match statements in terms of dollars | 23:37 | |
with statements in terms of goods and services. | 23:41 | |
From the point of view of goods and services | 23:44 | |
there is nothing that is more advantageous to a country | 23:45 | |
than a balance of payments deficits. | 23:48 | |
The feature of a balance of payments deficit | 23:51 | |
is that you are getting more goods coming in | 23:53 | |
than you are having to send out, | 23:55 | |
you're getting goods in return for sending out | 23:57 | |
pieces of paper, for dollars, | 23:59 | |
there is hardly a more advantageous export. | 24:01 | |
The only trouble with a balance of payments deficit | 24:03 | |
is that you cannot continue it indefinitely. | 24:05 | |
In consequently, it's fine while it lasts, | 24:08 | |
but it can't last. | 24:11 | |
Put in terms of the United States, | 24:13 | |
people are always talking about as if | 24:15 | |
the problem for the United States | 24:19 | |
is the existence of a balance of payments deficit. | 24:20 | |
There, in my opinion, is not the case. | 24:24 | |
The balance of payments deficit by itself | 24:26 | |
is an advantage, it means that we are getting something | 24:29 | |
in return for pieces of paper, dollar bills, | 24:32 | |
or bonds or things like that that we are shipping out. | 24:35 | |
The real problem for the United States | 24:38 | |
is not the deficit, but is the measures that we take | 24:40 | |
to eliminate the deficit. | 24:44 | |
In particular the kind of exchange controls | 24:46 | |
that we have taken in the form of controls | 24:49 | |
over direct investment abroad, | 24:51 | |
in the form of controls over bank lending, | 24:53 | |
interest equalization tax and so on. | 24:59 | |
These are the real problem. | 25:01 | |
If we only had the courage and the guts | 25:04 | |
simply to eliminate all these things, | 25:05 | |
to say we are not going to peg the dollar, | 25:08 | |
we are not going to impose controls on our people, | 25:10 | |
we are going to say a dollar is a dollar | 25:14 | |
and people can do whatever they want with it. | 25:15 | |
Why then we might still have a deficit | 25:17 | |
but if we did it would be because | 25:19 | |
people abroad wanted to accumulate dollars | 25:21 | |
as part of their assets, | 25:23 | |
and that would actually be fine from our point of view, | 25:24 | |
we would be getting as it were an interest-free loan | 25:27 | |
or a loan at a very low rate. | 25:29 | |
Such a policy of course to be viable for a long period, | 25:31 | |
would mean that we would have to be prepared, | 25:35 | |
if necessary, to let exchange rates go. | 25:36 | |
And this brings me back to the question | 25:39 | |
of why it is that central bankers all over the world | 25:41 | |
are always so opposed to fluctuating rates? | 25:45 | |
At bottom I think the reason is a very simple one. | 25:48 | |
The adoption of a world floating exchange rate system | 25:51 | |
of free markets for exchange rates | 25:55 | |
would put central bankers out of business. | 25:57 | |
Now I don't mean this quite so crudely as it sounds, | 26:00 | |
I don't mean to say that any central banker | 26:02 | |
ever says my god I mustn't let floating rates go | 26:04 | |
or else I would be out of a job. | 26:07 | |
He wouldn't be, he would still have | 26:09 | |
his domestic responsibilities. | 26:10 | |
I mean it in a much more subtle and sophisticated sense. | 26:12 | |
The central bankers are now engaged | 26:15 | |
in what seems to them very, very important duties. | 26:17 | |
They are, at the drop of a hat, being forced to fly over | 26:20 | |
oceans in order to meet in one or another places, | 26:24 | |
to meet for days, with every headline in every paper | 26:28 | |
in the world recording their doings, | 26:30 | |
they are at the center of things. | 26:33 | |
In a world of floating rates this wouldn't happen, | 26:35 | |
there would be no need for such conferences, | 26:37 | |
just as there are no need for such conferences | 26:40 | |
in the American stock exchange, | 26:42 | |
because rates there float. | 26:43 | |
It is very hard for people involved | 26:47 | |
in these conferences to say to themselves, | 26:49 | |
what I am doing is a bunch of make-work | 26:51 | |
of no importance, I could be replaced | 26:53 | |
by simply a market in which rates floated. | 26:55 | |
And consequently it is psychologically almost impossible | 26:58 | |
for central bankers, who like the rest of us, | 27:01 | |
must regard the work that they are doing | 27:05 | |
as serious, important and worthwhile, | 27:06 | |
it is almost impossible for them to accept the idea | 27:09 | |
that a floating rate system would work fine | 27:13 | |
and would make unnecessary these repeated crises, | 27:16 | |
these repeated international conferences. | 27:19 | |
Thank you, this is Milton Friedman. | 27:22 | |
- | Thank you, sir. | 27:26 |
If you have questions or comments | 27:27 | |
or suggestions for topics you would like discussed | 27:29 | |
in this series, please send them | 27:31 | |
to Instructional Dynamics Incorporated, | 27:33 | |
166 East Superior Street, Chicago, 60611. | 27:36 |
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