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- | Hello this is William Clark of the Chicago Tribune, | 0:02 |
welcoming you again on behalf of Instructional Dynamics | 0:05 | |
to a visit with the eminent economist | 0:08 | |
Professor Milton Friedman of the University of Chicago. | 0:11 | |
Dr. Friedman is there any change in the story being told | 0:14 | |
by the monetary indicators these days? | 0:18 | |
- | No I think the best conclusion is no change | 0:20 |
in the sense that you are continuing to have a ratherly | 0:25 | |
slow rate of growth of the quantity of money | 0:28 | |
compared to the way it was growing last year. | 0:31 | |
This continues to forecast a slackening in the rate | 0:33 | |
of growth of the economy of GNP, | 0:39 | |
sometime around the third or fourth quarter. | 0:42 | |
It portends a slackening of inflationary pressure | 0:45 | |
which may come a little later of course | 0:49 | |
in the slackening in GNP because typically speaking, | 0:51 | |
prices don't move until after you've had some impact | 0:56 | |
on physical volumes. | 0:59 | |
Perhaps the only thing that might be noted | 1:02 | |
is that it is now about four to five months after | 1:04 | |
the sharp turn in monetary policy of last December. | 1:10 | |
And therefore you are beginning to get into the area | 1:13 | |
of where some of these effects oughta start showing up. | 1:15 | |
And there are some signs of these effects showing up | 1:17 | |
in the economy. | 1:20 | |
The people who are very close watchers of the detail figures | 1:21 | |
published each month by the Department of Commerce | 1:26 | |
and Business Cycle Developments, the leading indicators | 1:29 | |
and series of that kind are almost uniform in reporting | 1:32 | |
that there are the beginning signs of a possible slowdown | 1:36 | |
in economic activity. | 1:42 | |
Now, of course, there have in the past been false signals | 1:44 | |
from these leading indicators. | 1:48 | |
- | M-hmm | |
- | And so, nobody can be certain that this is a really | 1:49 |
confirmed thing, but all you can say is that as yet all | 1:54 | |
of the evidence remains consistent with the forecast based | 1:57 | |
on earlier experience that the sharp slowdown | 2:01 | |
in monetary growth, if continued, as it has been up | 2:04 | |
to now, will in fact, produce slowing down in the rate | 2:07 | |
of growth in nominal GNP. | 2:12 | |
- | Your position has been, I think, isn't it | 2:16 |
that there's a possibility that the authorities are being | 2:18 | |
a bit too restrictive. | 2:22 | |
- | Oh yeah, I think they are being, if I had to judge, | 2:23 |
if I had to say on which side their going too far, | 2:27 | |
there's no doubt in my mind that if anything they're | 2:30 | |
being a little too tight. | 2:33 | |
This is a general difficulty of having patience. | 2:35 | |
You start that the Fed has moved and it feels, well now it's | 2:39 | |
stepped on the brake and nothing seems to be happening, | 2:43 | |
the figures don't show up, prices continue to soar, | 2:46 | |
there's some contradiction. | 2:49 | |
That there isn't really because you don't expect anything | 2:50 | |
to show up until six or eight or nine months | 2:53 | |
- | M-hmm. | 2:55 |
- | But we had another sign of that recently, | 2:56 |
Secretary Kennedy, made a statement that if you didn't have | 2:58 | |
signs soon that the inflation was being slowed down it would | 3:03 | |
be necessary to turn the screw another notch. | 3:07 | |
- | Yes. | 3:10 |
- | Now I personally think it would be an extremely grave | 3:11 |
blunder and a most unfortunate development, | 3:15 | |
if in fact, because of lack of patience for waiting to see | 3:17 | |
and get the results of the measures they have already taken, | 3:21 | |
if we fell into the trap that we have fallen into | 3:24 | |
so many times before | 3:26 | |
of overdoing the reaction. | 3:28 | |
- | M-mm. | |
- | As I say, in my opinion, if anything it's been a slight | 3:30 |
overdoing so far but as of this moment the degree | 3:32 | |
of overdoing is not significant, is it? | 3:35 | |
The money supply over the first four quarters, four months, | 3:38 | |
of this year has been rising at the rate of something like | 3:41 | |
4% a year. | 3:44 | |
If I were doing it I would've made it more nearly 5 or 6%. | 3:45 | |
But it's not nearly the kind of switch that you had | 3:48 | |
in 1966 when you went down to 0%. | 3:51 | |
- | M-hmm. | 3:53 |
- | So I think that if there is any overdoing | 3:54 |
as yet it's mild and I hope it doesn't get any worse. | 3:57 | |
- | (laughs) I see. | 3:59 |
Dr. Friedman some people have been disturbed | 4:01 | |
in the last few days by the report | 4:03 | |
of a substantial deficit in our International Balance | 4:05 | |
of Payments for the first quarter. | 4:09 | |
I wonder if you would comment on the significance of that? | 4:11 | |
- | Well the numbers are very funny. | 4:14 |
And they're not nearly as clear as they look at first. | 4:16 | |
The headlines screech of a 1.8 billion dollar balance | 4:20 | |
of payments deficit. | 4:24 | |
The fine print in the article says, of course, | 4:25 | |
there's more than one way of measuring the deficit | 4:29 | |
and if you measure it on the official settlements basis | 4:32 | |
there is, in fact, a 1.1 billion dollar surplus. | 4:35 | |
Now what is the difference between this? | 4:42 | |
How is it that one way of looking at it has a | 4:43 | |
1.7 billion dollar deficit and the other way | 4:45 | |
of looking at it has a 1.1 billion dollar surplus? | 4:48 | |
Well the answer is that the second way of looking at it | 4:52 | |
treats as a deficit, only those changes in outstanding | 4:55 | |
claims on dollars. | 5:01 | |
Only those dollars balances, those increases | 5:02 | |
in dollar balances which are in the hands | 5:04 | |
of official agencies, of central banks of other countries | 5:07 | |
or treasuries of other countries. | 5:10 | |
Now, as a footnote, it's very important to distinguish | 5:12 | |
that part 'cause that's the only part of a dollar balance | 5:16 | |
in which we even have a nominal obligation | 5:18 | |
to provide gold at $35 an ounce. | 5:20 | |
As I emphasized in my last tape I don't think, in fact, | 5:23 | |
any central banks gonna ask for it but as a matter of record | 5:26 | |
it's interesting to note that in this quarter, | 5:30 | |
the potential legal claims on our gold supply | 5:33 | |
has gone down, not up. | 5:37 | |
The reason for the large increase in the deficit | 5:39 | |
is apparently that there are private individuals | 5:41 | |
and supposedly this is in considerable measure, banks, | 5:44 | |
that have wanted to have larger dollar holdings | 5:47 | |
and in order to get these dollar holdings | 5:49 | |
they have withdrawn, well, | 5:51 | |
consider a European who wants dollars, | 5:54 | |
Englishman, he takes sterling to his, | 5:58 | |
to the Bank of England, and he buys dollars with it. | 6:00 | |
This shifts the dollars from an asset of the Bank of England | 6:03 | |
to an asset of the individual. | 6:08 | |
That dollar transaction would show up in our accounts | 6:10 | |
as that much less, that much of a surplus on the official | 6:13 | |
settlement of accounts. | 6:18 | |
And there's no change so far as that was concerned | 6:20 | |
on the standard account. | 6:22 | |
- | I see. | |
- | I said the standard account showed a deficit | 6:24 |
of 1.8 billion, the official settlements account showed a | 6:26 | |
surplus of 1.1, that means that something like | 6:29 | |
2.9 billion dollars, or close to 3 billion dollars | 6:33 | |
of additional dollars were accumulated in the hands | 6:36 | |
of non-official holders. | 6:39 | |
They've gotten 1.1 billion of that by withdrawing it | 6:42 | |
from their central banks and substituting | 6:44 | |
their own currency. | 6:46 | |
They got 1.8 billion of it by selling more | 6:47 | |
to the United States than they were buying | 6:50 | |
from the United States or by security transactions | 6:52 | |
which have the same effect. | 6:56 | |
Now, is this a cause for concern? | 6:58 | |
Personally I think it's no cause for concern whatsoever, | 6:59 | |
in the main I believe people have accumulated those dollars | 7:03 | |
'cause they wanted to hold larger dollar balances. | 7:05 | |
If they don't wanna hold that larger dollar of balances, | 7:07 | |
the first sign of that would be that they would turn | 7:10 | |
it back into the central bank because given our present | 7:12 | |
system of fixed exchange rates, nobody anywhere | 7:15 | |
has to hold dollar balances unless he wants to. | 7:18 | |
If he doesn't want to, it will show up in the form | 7:21 | |
of additional dollar balances at the central banks, | 7:24 | |
and therefore in my opinion from the point of view | 7:27 | |
of any real pressure on the dollar, the official settlements | 7:29 | |
balance from this point of view makes more sense | 7:32 | |
than the much more | 7:34 | |
- | M-hmm. | 7:35 |
- | prudent and talked about | |
general liquidity balance. | 7:37 | |
So I do not see myself, any reason, on the basis | 7:39 | |
of this result to really be concerned about American balance | 7:43 | |
of payments problems. | 7:46 | |
- | Doctor, we might switch for the moment from dollars | 7:49 |
to German Marks and perhaps other European currencies too. | 7:51 | |
There's been a great deal of activity, of course, | 7:56 | |
revolving around the German Mark lately perhaps you'd | 7:58 | |
care to comment on the significance of that? | 8:01 | |
- | Sure. | 8:03 |
The disturbance of the European currency Markets | 8:06 | |
is certainly extremely remarkable. | 8:08 | |
It has as you quite realize, and recognize, | 8:10 | |
it's political in it's economic aspects. | 8:13 | |
The political aspect of it apparently | 8:15 | |
is a pull and haw, a see-saw between | 8:17 | |
the Social Democrats on the one hand | 8:23 | |
and the Christian Democrats on the other. | 8:26 | |
The Christian Democrats are the party of Kiesinger, | 8:29 | |
they are the party, it was the party | 8:32 | |
of Adenauer and Erhard. | 8:33 | |
The Social Democrats are the formerly socialist party | 8:36 | |
of Willie Brandt and you recall that a couple of years ago | 8:39 | |
they made the Grand Coalition and the two parties | 8:43 | |
together have been having a joint coalition government | 8:46 | |
which is running Germany. | 8:49 | |
But this fall, in September, there are elections coming up | 8:53 | |
and the coalition is giving every sign of falling apart | 8:56 | |
at the seams as the two major parties to the coalition, | 8:59 | |
each is trying to see how it can improve its own electoral | 9:04 | |
position and the chance of getting votes. | 9:09 | |
Well now the original run on the, the reverse of a run, | 9:12 | |
we usually talk about run on a currency, | 9:18 | |
I don't know how you describe a run into a currency. | 9:20 | |
- | (laughing) | 9:22 |
- | Because what there was, was a rush, | 9:23 |
I guess maybe a rush is the way to do it. | 9:25 | |
- | That's a good way. | 9:26 |
- | A rush to buy Marks. | |
At any rate, the rush on the Mark, | 9:28 | |
came after the Economics Minister Mr. Schiller | 9:32 | |
who happens to be from the Social Democratic party, | 9:37 | |
the Socialist party, after he made a public statement | 9:39 | |
that it was desirable for Germany to revalue, | 9:42 | |
appreciate the Mark buy 6 1/2% | 9:46 | |
and the result of this was to cause a rush | 9:49 | |
of people trying to buy Marks and take advantage | 9:51 | |
of the opportunity to earn some, money. | 9:53 | |
However, when they got together int he government, | 9:57 | |
the Christian democrats, headed by Mr. Kiesinger, | 10:00 | |
were strongly opposed to re-valuing. | 10:02 | |
Underlying this, battle about the Mark, | 10:04 | |
is apparently, I'm no expert I should say, | 10:09 | |
on the German political or economic scene, | 10:11 | |
but my understanding is that underlying this | 10:13 | |
is the difference in the constituencies | 10:16 | |
to which they appeal. | 10:17 | |
The Christian Democrats are relatively strong, | 10:19 | |
the old line conservative party are relatively strong | 10:23 | |
both among the farming community and the exporters, | 10:26 | |
and both of these are opposed to an appreciation. | 10:31 | |
The farming community is opposed to it because under | 10:33 | |
the rules, I think I mentioned this earlier, | 10:35 | |
under the rules of the common market they have a price | 10:37 | |
fixing scheme just the same kind of foolishness we have, | 10:40 | |
apparently nobody can ever learn from anybody else. | 10:43 | |
- | (laughs) | 10:44 |
- | Everybody has | |
to do it for himself. | 10:45 | |
- | Yes you did mention that. | 10:46 |
- | And they have a price fixing scheme of this kind | 10:47 |
under which the price is determined by in dollars, | 10:49 | |
and therefore if the Germans appreciate, | 10:52 | |
that is to say, if they make fewer Marks correspond | 10:56 | |
to a certain number of dollars, that lowers | 10:59 | |
the support price of agricultural product in Marks | 11:03 | |
and the German farmers are interested in Marks. | 11:06 | |
And so the government would either have to break | 11:08 | |
the common market agreement or do some kind | 11:10 | |
of a supplementary way or else the farmers would be hurt. | 11:13 | |
And this is a major reason why the Christian Democrats | 11:15 | |
have been strongly opposed to appreciating. | 11:18 | |
From the point of view of the Social Democrats | 11:20 | |
I suppose they regard that as an advantage, | 11:22 | |
this would alienate some of the constituency | 11:24 | |
of the Christian Democrats and I have heard stories | 11:27 | |
that in addition they thought it might be a rather clever | 11:29 | |
device for them to be in the forefront of an appreciation | 11:32 | |
because this would give a bonus to tourists. | 11:36 | |
That is if a German worker was gonna go on a vacation | 11:38 | |
to Southern France, he would be able to get more francs | 11:42 | |
with a given amount of Marks and therefore, | 11:45 | |
I understand that the question is in part, | 11:47 | |
desired by the Social Democrats to butter up | 11:50 | |
to potential tourists at the expense of the constituency | 11:52 | |
of the Christian Democrats. | 11:56 | |
Well you can see why this became a great political issue. | 11:57 | |
And it ended up with the Christian Democrats, | 12:00 | |
who are the senior partner in the coalition essentially, | 12:02 | |
overruling Mr. Schiller and coming out with | 12:06 | |
a firm statement that they were not going to appreciate | 12:12 | |
and that this was good for eternity. | 12:16 | |
- | M-hmm. | 12:17 |
- | Well I do hope | |
that the eternity you and I experience is a little longer | 12:19 | |
than the one this is gonna be. | 12:22 | |
- | (laughs) | |
- | Because I don't believe that they, | 12:23 |
well I as I said, I think I said last time | 12:25 | |
I'd be willing to give more than even money | 12:27 | |
that sometime within the next six months | 12:30 | |
the German Mark is going to be appreciated. | 12:32 | |
However, as I've been reading the papers | 12:34 | |
and the comments on this episode, there's one phase of it | 12:36 | |
and now I come to the economics as opposed | 12:39 | |
to the politics of it. | 12:41 | |
- | M-hmm. | |
- | There's one phase about the economics of it | 12:43 |
which I believe is very widely misunderstood. | 12:45 | |
And that is, the very great difference that there is | 12:48 | |
between the position of a country which is experiencing | 12:51 | |
a rush into it and the position of a country which is | 12:54 | |
experiencing a run on it. | 12:57 | |
If we go back to the run cases, the cases of Britain | 13:00 | |
a couple of years ago when it was forced to devalue | 13:04 | |
or even the case of France right now, | 13:07 | |
which is subject to run or Britain now. | 13:09 | |
Both of these. | 13:12 | |
If we go back those cases, it is possible | 13:13 | |
for speculative runs on the currency essentially | 13:18 | |
to force a devaluation, whatever the country's desires | 13:22 | |
may be, because what does a run on sterling mean? | 13:24 | |
It means that people sell sterling and buy dollars. | 13:29 | |
In order to maintain the price of sterling the central bank | 13:34 | |
has to be prepared to accommodate everybody who wants | 13:37 | |
to sell the sterling. | 13:39 | |
The only way it can accommodate it is by using | 13:43 | |
up it's reserves of dollars. | 13:45 | |
But it inevitably has a limited reserve of dollars | 13:46 | |
and therefore there is necessarily a termination date. | 13:49 | |
- | M-hmm. | 13:52 |
- | Now at the moment, | |
the French are at an extremely good position | 13:53 | |
to counter such a run and it is very likely | 13:56 | |
that they can hold it off until after their presidential | 13:59 | |
elections because they have very, very large reserves there. | 14:01 | |
They have large stocks of gold that they accumulated | 14:05 | |
during the de Gaulle's gold accumulating period. | 14:08 | |
They also have borrowing rights from the IMF and so on. | 14:10 | |
I've forgotten the exact number but it's something like | 14:14 | |
six to eight billion dollars that they can draw on, | 14:16 | |
automatically. | 14:18 | |
- | M-hmm. | |
- | So that they can, but that nonetheless is the limit | 14:20 |
to them, they can't go beyond that. | 14:22 | |
Now consider the case on the other hand | 14:24 | |
of the German government. | 14:26 | |
The German government you have people wanting to buy Marks. | 14:29 | |
They come and they say we have dollars, we think | 14:33 | |
that if we buy Marks now we can later sell them | 14:36 | |
for more dollars, we wanna buy Marks. | 14:39 | |
Well, now Marks are something | 14:42 | |
that the German government prints. | 14:43 | |
- | Hmm. | 14:45 |
- | It's got a printing press, I'm talking figuratively | 14:45 |
of a printing press, it really isn't a printing press, | 14:49 | |
it's a I suppose a better analogy in the modern world | 14:52 | |
would be an accountant's pen. | 14:55 | |
Because what it really is, is a writing on a book | 14:57 | |
of the profit liability in Marks. | 15:00 | |
You come to a German commercial bank and say, | 15:02 | |
here's a hundred dollars I want 400 Marks | 15:06 | |
and the bank writes on the book 400 Marks, | 15:08 | |
it has a hundred dollars, it can now take that hundred | 15:11 | |
dollars to the German central bank | 15:13 | |
and the German central bank in its turn can create | 15:15 | |
the 400 Marks to provide the, | 15:18 | |
the commercial bank with the banking. | 15:22 | |
Well now given that Germany has a printing press | 15:25 | |
it can, in this sense, create an infinite amount of Marks | 15:29 | |
and so there is no technical reason why Germany | 15:33 | |
could not accommodate an indefinite inflow. | 15:37 | |
The stories are that there was a four billion dollar inflow. | 15:40 | |
What does that mean? | 15:43 | |
That means that Germany now has four billion dollars | 15:44 | |
that formerly were held by private individuals | 15:49 | |
and those individuals have a claim on Germany | 15:52 | |
of four billion dollars times the number of Marks, | 15:55 | |
which is roughly four Marks to the dollar | 15:57 | |
so they have roughly 16 billion Mark obligations. | 15:59 | |
Now if you just looked at it that way, | 16:03 | |
there's no reason that that situation couldn't sit there | 16:05 | |
indefinitely, the Germans can hold the four billion dollars | 16:07 | |
and the people who, the speculators could hold | 16:10 | |
the 16 billion Marks. | 16:14 | |
Now of course we have to go beyond that, | 16:16 | |
but I wanna go beyond but let me go back up a little bit. | 16:20 | |
In the case of the, of the devaluation. | 16:23 | |
The case of the British or the French, | 16:28 | |
the run as opposed to the rush, | 16:30 | |
as they get lower and lower down on reserves | 16:34 | |
they are driven more and more to a position | 16:36 | |
where they must devalue, even though it's very costly | 16:38 | |
to them to devalue, but they have nothing else to do. | 16:40 | |
The situation is almost the reverse for Germany, | 16:43 | |
as Germany goes more and more into this accumulation | 16:46 | |
of Marks, there's nothing, it doesn't add to the pressure | 16:49 | |
on them to appreciate it, in fact, | 16:52 | |
it's the other way around. | 16:53 | |
It makes it more costly for them to appreciate. | 16:55 | |
Because let's stop at that moment, let's suppose | 16:58 | |
here we are, the Germans have their four billion dollars. | 17:00 | |
The outsiders have 16 billion Marks. | 17:05 | |
If Germany appreciates, that means that Germany says, | 17:09 | |
instead of one Mark, instead of one dollar equaling | 17:13 | |
four Marks, one dollar will equal maybe 3.6 Marks, | 17:16 | |
it'll be a smaller number. | 17:19 | |
Let's go extreme, let's suppose, well let's say 3.6 | 17:21 | |
that's alright, that would be a 10% appreciation. | 17:24 | |
That means that instead of a Mark costing 25 cents, | 17:27 | |
a Mark would cost something like 28 cents. | 17:31 | |
Now, from the point of view of the Germans, | 17:36 | |
they cannot now buy back those 16 billion Marks | 17:39 | |
for the four billion dollars they have. | 17:42 | |
They need more than four billion dollars to buy them back. | 17:44 | |
If they appreciated by 10% under this circumstance, | 17:46 | |
in effect, they are saying we will give the speculators | 17:50 | |
10% more dollars back than they gave us | 17:53 | |
and thus it would cost Germany 400 million dollars | 17:56 | |
to appreciate by 10%. | 18:00 | |
In the form of precisely paying the profit, | 18:02 | |
four hundred million dollar profit to the speculators. | 18:06 | |
- | I see. | 18:08 |
- | Now, since Germany can so far as this part | 18:09 |
of it is concerned, hold off more or less indefinitely, | 18:12 | |
there's no pressure in this score (mumbles), | 18:15 | |
if another four billion dollars aren't gonna come in, | 18:19 | |
well they can print 16 billion more Marks. | 18:22 | |
Why then, the more, the larger of the inflow of this kind, | 18:25 | |
the greater the cost to Germany of appreciating, | 18:28 | |
and therefore the greater temptation for Germany | 18:31 | |
to postpone it. | 18:33 | |
From this point of view what Germany would like | 18:35 | |
to do, and that's why she keeps making these strong | 18:36 | |
statements about eternity, if Germany can only persuade | 18:38 | |
the rest of the world, the speculators, | 18:42 | |
that there is going to be no appreciation | 18:44 | |
and induce them to withdraw that four billion dollars, | 18:46 | |
and put back in the 16 billion. | 18:50 | |
Then at that point she can appreciate | 18:52 | |
and not incur this particular cost of the speculative cost. | 18:54 | |
And that's obviously the tactic which Germany is following, | 18:58 | |
she is trying to establish a climate | 19:01 | |
in which people will withdraw their funds | 19:04 | |
and then permit Germany to appreciate. | 19:07 | |
- | Doctor in that case why should Germany ever appreciate, | 19:11 |
what is the pressure for appreciation? | 19:14 | |
- | Well the pressure for appreciation does not come | 19:17 |
from this capital movement, the pressure | 19:20 | |
for appreciation comes from it's kind account. | 19:23 | |
Suppose for a moment that there were no speculative | 19:26 | |
movements in or out. | 19:28 | |
Then the situation is that, at the present time, | 19:29 | |
Germany is exporting more than she's importing. | 19:32 | |
Again, that's a, that's a shorthand. | 19:36 | |
That is Germany gets foreign currencies by exporting | 19:39 | |
goods or because people invest in Germany or because people | 19:42 | |
give money to Germany and Germany requires foreign exchange. | 19:45 | |
Because, I may, did I say foreign goods before? | 19:50 | |
I meant foreign exchange. | 19:52 | |
Germany acquires foreign, requires foreign exchange | 19:53 | |
in order to buy foreign goods, in order to invest abroad | 19:57 | |
and so on. | 20:00 | |
Now, independently completely of these speculative movements | 20:01 | |
for short run gains, Germany has been running a surplus | 20:04 | |
on current account. | 20:07 | |
That is to say, Germany has been acquiring more foreign | 20:07 | |
currency than she has been wanting to spend. | 20:11 | |
This means, in physical terms, that part of Germany's | 20:14 | |
resources have been used to ship out goods and services | 20:18 | |
without getting anything back in return. | 20:21 | |
So on a physical ground this is a strong | 20:23 | |
cost to Germany of maintaining a surplus | 20:27 | |
on current account. | 20:31 | |
On the financial side, this means that Germany, | 20:33 | |
German banks, German people are acquiring foreign exchange | 20:38 | |
which they are handing into the central bank for Marks | 20:42 | |
and this puts upward pressure on the money supply | 20:44 | |
which has to be counted by monetary operations type money | 20:46 | |
or the line. | 20:50 | |
Or to put it another terms, a combination of these | 20:51 | |
is to produce upward pressure on German prices. | 20:54 | |
Produce upward pressure because Germany is selling | 20:57 | |
much abroad and buying little, which makes physical volume | 21:00 | |
of goods available smaller than it otherwise would be. | 21:03 | |
Upward pressure because on the monetary side | 21:05 | |
it's tending to increase the quantity of money. | 21:07 | |
And consequently, the combination of these means | 21:10 | |
that it would be in Germany's economic interest | 21:13 | |
to appreciate as a way of avoiding these excessive exports | 21:16 | |
and deficient imports that she's now bearing. | 21:21 | |
That's on the current account. | 21:24 | |
But now that effect, while, it's always present, | 21:25 | |
is sort of a continuing steady one, | 21:29 | |
it's like a, like a low grade throb in your toothpaste, | 21:32 | |
not like in, a tooth, in your tooth if you've got a cavity, | 21:36 | |
not an acute one. | 21:40 | |
And as a result, from that point of view, | 21:41 | |
while it's in Germany's interest to appreciate | 21:44 | |
it isn't a case of having to do it today | 21:46 | |
or immediately, there's no reason why it can't | 21:50 | |
be put off some time. | 21:52 | |
And that's the, that pressure needs to be distinguished | 21:53 | |
sharply from this pressure of the speculative inflow. | 21:57 | |
Now with respect to this speculative inflow again, | 22:01 | |
the other part of it that's kind of interesting | 22:05 | |
is to look at it from the financial point of view. | 22:07 | |
I said technically speaking, there's no reason why Germany | 22:09 | |
can't hold on and the cost of appreciating, | 22:13 | |
while there are such large speculative balances | 22:15 | |
are very great, if you appreciate it by 10%, | 22:18 | |
four hundred million dollars. | 22:22 | |
- | M-hmm. | 22:23 |
- | But it's even more extreme than that. | 22:24 |
If we go and start looking at the form | 22:26 | |
in which these things happen. | 22:28 | |
The money which Germany gets in dollars, | 22:31 | |
she doesn't have to hold in the form of dollar bills, | 22:34 | |
or in the form of demand deposits. | 22:37 | |
In another story in The Wall Street Journal | 22:39 | |
about this episode was a very large increase | 22:42 | |
in the volume of U.S. Treasury securities held | 22:45 | |
for the account of others. | 22:48 | |
Now what that really means, underneath all that verbiage, | 22:49 | |
is in Germany, which has been acquiring claims | 22:53 | |
on U.S. banks by the people who have been buying the Marks, | 22:56 | |
has been saying to the Federal Reserve, | 22:59 | |
would you please buy Treasury Bills for us for them. | 23:00 | |
So a large part of this four billion dollars that I've been | 23:03 | |
talking about, Germany is earning something close to 6% on. | 23:05 | |
The Treasury Bill rate is now about 6%. | 23:08 | |
I say Treasury Bills, I don't know I'm not privy | 23:10 | |
to these secrets, maybe what Germany's been buying | 23:13 | |
has been long term bonds or I don't know what notes. | 23:15 | |
But I assume, I would be very, very surprised | 23:18 | |
if it were not Treasury Bills. | 23:22 | |
So Germany's earning 6% on these Treasury Bills. | 23:23 | |
On the other hand the people that have bought the Marks, | 23:26 | |
they of course are not holding these Marks in pieces | 23:29 | |
of paper they are holding them at deposits of German bank. | 23:33 | |
But the German interest rate is much lower | 23:36 | |
than the American interest rate. | 23:38 | |
The interest rate in Germany, I'm not sure what it is | 23:39 | |
on a comparable Treasury Bill but the discount rate | 23:41 | |
in the U.S. is 6% and in Germany, if my memory is right, | 23:44 | |
it's about 3%. | 23:47 | |
- | I see. | 23:49 |
- | So here you have, in addition to everything else, | 23:50 |
the Germans as it were are earning 5% | 23:52 | |
on the four billion dollars and they are maybe paying 3% | 23:55 | |
on the counterpart in Marks, so in addition | 24:00 | |
to avoiding the cost of appreciating they are right now | 24:04 | |
earning a nice interest sum. | 24:06 | |
And even that understates it because if we get | 24:10 | |
to the final complication, the one real problem Germany has | 24:13 | |
with this is how to prevent this temporary inflow of Marks, | 24:17 | |
this speculative inflow of funds. | 24:21 | |
Speculative inflow of dollars and accumulation of Marks. | 24:24 | |
How to prevent that from causing monetary expansion | 24:27 | |
in Germany. | 24:30 | |
Just as I was saying earlier that when Germany runs a | 24:31 | |
surplus on current accounts this adds to the Mark funds | 24:34 | |
available to commercial banks and now, if similarly, | 24:37 | |
let's say a speculator buys a thousand marks with $250. | 24:42 | |
The German bank, he puts it in a commercial bank. | 24:48 | |
The German bank takes the $250 to the Central Bank, | 24:51 | |
it gets a thousand Marks, now it thinks it's got excess | 24:54 | |
reserves and can lend it out and that, in and of itself, | 24:56 | |
would produce very strong inflationary pressure | 24:59 | |
in Germany. | 25:02 | |
So in order for this whole operation to be feasible, | 25:03 | |
the German Central Bank has to offset this inflationary | 25:06 | |
pressure. | 25:08 | |
Now it could do so by open market sales, | 25:09 | |
but in fact, and again I turn to what's, | 25:11 | |
I'm reading in the newspaper they've been | 25:14 | |
doing it a different way. | 25:15 | |
The Germans have announced that they are going to require | 25:17 | |
their commercial banks to keep 100% reserves behind | 25:19 | |
such foreign deposits. | 25:22 | |
Well now the effect of this will be | 25:24 | |
that you sterilize any tendency for this inflow of Marks | 25:26 | |
to increase the internal money supply in Germany. | 25:31 | |
But also, it means that German banks will not be willing | 25:34 | |
to pay any interest on these Marks. | 25:37 | |
And so the situation is going to be that Germany will, | 25:39 | |
as it were, be able to earn 5% on the dollars | 25:43 | |
and will essentially be paying 0% on the Marks | 25:45 | |
that the speculators are holding. | 25:50 | |
And this will offset, this or, this will be a, | 25:53 | |
an added advantage to holding it, | 25:57 | |
but I suppose I haven't made the calculation. | 25:59 | |
I guess it would take, no would take a very long time | 26:02 | |
before that would offset the cost of appreciating, | 26:05 | |
I was saying they could wait, | 26:07 | |
- | (laughs) | |
- | until they earned enough interest to pay them off. | 26:08 |
But that would be two years because of the 5% interest | 26:10 | |
rate and if we talk about a 10% depreciation. | 26:13 | |
But at any rate, you see, the net effect | 26:15 | |
of these operations, is that Germany is in a position | 26:17 | |
to hold this for a very long time on capital account. | 26:21 | |
In a way what you have is therefore, a test of patience, | 26:24 | |
between the German government in being unwilling | 26:27 | |
to give the speculators a gain | 26:30 | |
and the willingness of the speculators | 26:35 | |
to hold on. | 26:37 | |
Now from the point of view of the speculators | 26:38 | |
it's not costless. | 26:40 | |
Because it turns out that from the point of view | 26:43 | |
of the speculators, if you're buying Marks, | 26:45 | |
you are sacrificing the interest you otherwise could earn | 26:50 | |
on your funds. | 26:52 | |
And let's say that's 5% a year. | 26:53 | |
Well, that's still profitable if you're gonna wait, | 26:56 | |
if you're gonna wait three months, let's say, | 27:00 | |
and you think there's gonna be an appreciation | 27:02 | |
of 10% in three months, the interest cost | 27:03 | |
will only eat up about 2 1/2%, which will leave you with | 27:06 | |
7 1/2% profit. | 27:08 | |
But in addition to that there are the costs of buying | 27:10 | |
and selling, in addition to that, there is the risk | 27:12 | |
that it maybe six months, it may be nine months. | 27:14 | |
So, on the whole, my conjecture would be | 27:17 | |
that the Mark balances will decline substantially | 27:21 | |
and that they may, maybe they'll decline substantially | 27:25 | |
enough so that the German government will be willing | 27:28 | |
to pay the price of appreciating and getting this | 27:30 | |
off the sly. | 27:33 | |
Now, I should, finally in completing this round up | 27:34 | |
about that situation, say that so far as the sterling | 27:37 | |
and the franc problem, it makes their problem | 27:41 | |
very much harder. | 27:43 | |
Because one of the, I talked as if it was only dollars | 27:45 | |
that was being used to by Marks, but in fact, | 27:48 | |
it's francs and sterling that have been used to buy Marks, | 27:52 | |
and so the counterpart of this on the part of the British | 27:56 | |
and the French is that you have people coming | 28:01 | |
to the Bank of England with, with sterling | 28:04 | |
buying dollars from the Bank of England, | 28:07 | |
using those dollars to buy Marks in, in Germany. | 28:09 | |
So, the final piece you need to add to this | 28:14 | |
is that the reports in the paper point out | 28:16 | |
that French and British borrowing from | 28:19 | |
the U.S. Federal Reserve Bank, has gone up substantially. | 28:22 | |
So a large part of what's happened, I don't know | 28:26 | |
how big a part, is that instead of the French | 28:29 | |
and the British having these dollar balances, | 28:32 | |
the Marks now have it, the Germans now have it. | 28:34 | |
That's why the U.S. is largely, independent, | 28:37 | |
is not very much affected by this whole kind of operation. | 28:40 | |
But it does put greater pressure on the French | 28:44 | |
and the English and therefore increases the probability | 28:46 | |
of the devaluation of one or another of these currencies. | 28:49 | |
- | Thank you very much Dr. Friedman. | 28:52 |
Don't forget if you subscribers have questions | 28:54 | |
that you would like to hear discussed on this series | 28:56 | |
please send them to Instructional Dynamics Incorporated, | 28:59 | |
166 East Superior Street, Chicago, 60611. | 29:03 | |
This is William Clark, Dr. Friedman and I will be | 29:08 | |
visiting with you again soon. | 29:10 |
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