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- | Hello this is William Clark of the Chicago Tribune | 0:02 |
inviting you to another visit with the eminent economist | 0:05 | |
Dr. Milton Friedman of the University of Chicago. | 0:08 | |
I think I would mention Doctor too | 0:12 | |
that we're recording this interview | 0:14 | |
on Thursday, June 12th, and there's a lot to talk about. | 0:15 | |
First, I wonder if we might check up | 0:20 | |
on what's been happening to your money supply | 0:22 | |
indicators since our last visit. | 0:24 | |
- | All, all steady is probably the best simple description | 0:26 |
and the quantity of money has, | 0:31 | |
on the average over the last five months, | 0:35 | |
risen somewhere around 3% per year, | 0:37 | |
whichever of the various reasonable definitions you take. | 0:40 | |
There have been ups and downs in the money supply | 0:44 | |
from week to week. | 0:47 | |
In fact, there have been two gyrations, a sharp rise | 0:48 | |
followed by a fall. | 0:52 | |
These appear to reflect something about the | 0:53 | |
seasonal movement that is not fully accounted for | 0:57 | |
in the seasonal adjustment. | 1:00 | |
Because if one looks at this chart, you'll find that a peak, | 1:01 | |
recent peak is exactly 13 weeks away from another one, | 1:05 | |
earlier in the year and 13 weeks is one quarter of 52, | 1:09 | |
or a quarterly movement. | 1:13 | |
And week by week, the recent ups and downs | 1:14 | |
of the money supply have been following precisely | 1:16 | |
the same quarterly pattern that they did | 1:19 | |
just precisely a quarter earlier. | 1:21 | |
And therefore the right thing to do is to average these out. | 1:23 | |
And when you do that, I think the best simple statement is, | 1:26 | |
that the Fed is continuing on the course of raising | 1:28 | |
the quantity of money at a fairly steady rate, | 1:31 | |
fairly steady when you average over months, | 1:35 | |
very unsteady, when you look at it from week to week. | 1:37 | |
But at a rate of something like 3% a year. | 1:41 | |
I went back and calculated what the rate of change would be | 1:45 | |
from the four weeks ending in the middle of December, | 1:49 | |
because the real data, if you're going to date the change | 1:52 | |
in policy, probably the best single date is December 4th, | 1:56 | |
when there was a meeting | 2:00 | |
of the Open Market Investment Committee of the Fed, | 2:01 | |
which it essentially did shift its gears. | 2:04 | |
And so I have been using, as a base for my calculations, | 2:06 | |
the four weeks centered on that date. | 2:09 | |
The four weeks ending December 18th, two weeks after | 2:12 | |
and two weeks before. | 2:14 | |
And so I recently went back and calculated, | 2:16 | |
what the rate of change would be | 2:18 | |
from that particular four-week period, | 2:19 | |
to a whole succession of four-week periods. | 2:21 | |
And it turned out that since December the highest rate | 2:24 | |
you could get that way was about 5% | 2:27 | |
and the lowest rate you got that way was about 2%. | 2:29 | |
Well that pretty well defines, the range within which | 2:32 | |
the quantity of money has been moving over | 2:35 | |
that five months period. | 2:37 | |
Now given this behavior of the money supply, | 2:40 | |
it is getting to be just about time for that to show up | 2:46 | |
more significantly than it has so far | 2:49 | |
in the behavior of the economy. | 2:52 | |
As you know, as yet, there is very little sign | 2:54 | |
that it has shown up. | 2:57 | |
There are a few preliminary indications, unemployment rate | 2:58 | |
reached its trough several months back at about 3.2 | 3:04 | |
and has since risen to about 3.5. | 3:08 | |
Employment, the other side of it, has been growing, | 3:12 | |
grew rather slowly last month. | 3:15 | |
It was very slow, | 3:16 | |
abnormally low increase in the labor force. | 3:18 | |
There are other little bits of indications | 3:21 | |
that there may be some tapering off in the economy. | 3:23 | |
But as I think I've said before, if you were to rely | 3:26 | |
on those indications alone, | 3:29 | |
you could not have any confidence | 3:31 | |
that they were not false signals. | 3:32 | |
We've had many perverse movements of that kind in the past. | 3:34 | |
And so if there's to be any confidence, | 3:38 | |
which I do have, very strong confidence, | 3:41 | |
that there will be a real slow down in the economy | 3:43 | |
sometime within the next, which will start showing up, | 3:45 | |
sometime within the next few months. | 3:48 | |
It's based, not on those indications, but on the fact | 3:50 | |
that there has been this sharp slow down | 3:53 | |
in the money supply. | 3:54 | |
And historically, such a slow down in the money supply | 3:55 | |
has always been followed, about six months, nine months, | 3:58 | |
eight months, seven months later, by a slow down | 4:01 | |
in the economy and I see no reason to suppose | 4:05 | |
that this is gonna be an abnormal case. | 4:07 | |
- | I see. | 4:09 |
Doctor, of course we've had this week, this move upward | 4:10 | |
in the prime loan rate, to the historic high of 8.5%. | 4:14 | |
And I know your subscribers would like to | 4:19 | |
hear your comments on that. | 4:21 | |
- | Well in the main of course, | 4:23 |
the rise in the prime rate is a | 4:25 | |
manifestation, or a recording, of what has already happened. | 4:30 | |
As you know, | 4:34 | |
the number of loans, | 4:38 | |
the fraction of loans affected directly | 4:39 | |
by the rise in the prime rate is very few. | 4:41 | |
Various estimates suggest, that perhaps 20% of all loans | 4:44 | |
are immediately affected by the prime rate. | 4:48 | |
Most loans are not made at the prime. | 4:50 | |
What happens is, that when there is upward pressure | 4:55 | |
on rates, banks start charging premiums above the prime, | 4:58 | |
which go up, other lenders start asking it | 5:02 | |
and then after a point, when the actual rates charged | 5:05 | |
get too far away from the prime rate, | 5:08 | |
why then the prime rate is adjusted to | 5:09 | |
come in line. | 5:16 | |
- | So it should. | 5:17 |
- | Right, it always reminded me of a, | 5:18 |
of the story my old teacher Frank Knight used to tell | 5:21 | |
about the different kind of leaders. | 5:23 | |
And he used to tell about the ducks that fly in the air. | 5:25 | |
And they'd fly in a vee with the leader in front, | 5:28 | |
this particular breed of ducks. | 5:30 | |
But every once in awhile, the followers would veer off | 5:32 | |
and go in a different direction. | 5:34 | |
And after a bit, the leader would look behind | 5:36 | |
find there was nobody in back of him, | 5:39 | |
he'd rush over to get in front. | 5:40 | |
(William chuckles) | 5:42 | |
Well that's the way the prime rate in a large sense behaves. | 5:42 | |
So what it's recording has been the very sharp rise | 5:45 | |
in interest rates that has taken place | 5:50 | |
throughout the market. | 5:51 | |
Long term interest rates, if you look a the rate | 5:53 | |
on long term government securities, | 5:55 | |
or on long term corporate, has been behaving in a rather | 5:57 | |
interesting fashion. | 6:01 | |
It reached a temporary peak about a month, | 6:02 | |
month and a half ago. | 6:06 | |
Then it came down, the rate lowered. | 6:07 | |
Now it's come back up again, past its previous peak. | 6:09 | |
So the fact is that while long term rates now | 6:14 | |
are extremely high and prices of bonds low, | 6:16 | |
what they have done is you sort of have a double top | 6:19 | |
in the rates, or a double bottom in prices, | 6:23 | |
they made it a coupla months ago | 6:25 | |
and now they've come back up again. | 6:26 | |
And what all this reflects, is the fact that you have had | 6:30 | |
continued inflationary pressure, continued rises | 6:35 | |
in nominal income, as a result of the very rapid expansion | 6:39 | |
of money supply last year. | 6:44 | |
So what you are seeing in the interest rate markets | 6:47 | |
is the coincidence of the long term effect | 6:50 | |
of easy money a year ago, plus the short term effect | 6:54 | |
of tight money today, both working in the same direction. | 6:57 | |
As I have repeatedly mentioned on here, | 7:02 | |
the historical evidence suggests that when there is a change | 7:04 | |
in the rate of monetary growth, when for example | 7:10 | |
the rate of monetary growth speeds up, | 7:13 | |
the first impact is to lower interest rates, | 7:16 | |
or to make interest rates lower than they otherwise | 7:19 | |
would be, that's the short run effect. | 7:21 | |
However, such a speed up in money also tends to, go back, | 7:24 | |
let me go back for a moment and give us perspective. | 7:31 | |
What I'm describing is precisely what happened in the middle | 7:34 | |
of 1968 when the surtax was passed. | 7:37 | |
There was a speed up in the rate of growth | 7:39 | |
in the money supply, | 7:42 | |
- | Yes. | |
and the short run effect of that was to lower, | 7:43 | |
was to hold interest rates down. | 7:44 | |
However, as that happens the increase in the money supply | 7:47 | |
at the lower interest rates tend to over stimulate, | 7:52 | |
or to stimulate the economy. | 7:54 | |
This tends to raise incomes, which raises the demand | 7:56 | |
for loanable funds and so while the short run effect | 7:58 | |
is to lower interest rates, the delayed effect | 8:02 | |
is to raise 'em. | 8:04 | |
And our studies suggest that the first six months | 8:07 | |
you have the downward pressure on interest rates | 8:10 | |
and after six months you have the upward pressure. | 8:12 | |
I say six months, again that's a summary | 8:16 | |
of variable periods. | 8:18 | |
That's the delayed impact from last year, | 8:20 | |
which is still having its effect on the economy | 8:22 | |
and on the interest rates. | 8:26 | |
On the other hand, reverse this. | 8:27 | |
Suppose you have tight money. | 8:31 | |
Suppose the rate of monetary growth slows down | 8:32 | |
as it did in December. | 8:34 | |
Well then the first impact on that | 8:35 | |
is to raise interest rates, | 8:37 | |
but the delayed impact after six or seven months, | 8:39 | |
or so, after it hits the economy will be to lower it. | 8:42 | |
Well then as of the moment, for the past six months | 8:45 | |
you have had both the delayed impact of last year's | 8:48 | |
easy money, plus the short term impact of this year's | 8:52 | |
tight money, working in the same direction | 8:55 | |
to raise interest rates, and that's why. | 8:57 | |
At the end of one of these episodes you always have | 8:59 | |
these climactic movement in interest rates. | 9:02 | |
You had it in 1966, when exactly the same combination | 9:04 | |
of circumstances affected interest rates, | 9:09 | |
from let's say something like April '66 | 9:13 | |
to something like September '66. | 9:15 | |
The present pattern is not dissimilar from that. | 9:17 | |
And you get an insight on what's going on now | 9:19 | |
if you go back and look at this earlier period. | 9:22 | |
Almost every word I've just said about the present period, | 9:26 | |
you could say about that period. | 9:28 | |
In 1965, the Fed speeded up the rate of monetary growth | 9:30 | |
when the Vietnam war took off | 9:35 | |
and Vietnam expenditures took off. | 9:36 | |
And it wanted to hold down the interest rate | 9:38 | |
on government securities at that time. | 9:40 | |
So the money supply started rising rapidly. | 9:43 | |
Its short term impact was to hold down interest rates. | 9:46 | |
They continued to rise, but they didn't rise | 9:50 | |
as much as they otherwise would. | 9:52 | |
But along in six, or seven, or eight months later, | 9:54 | |
they started having the opposite effect. | 9:57 | |
And then in March or April of 1966, the Fed stepped hard | 9:58 | |
on the brake, so that date March or April of '66, | 10:02 | |
is comparable to December of 1968, | 10:06 | |
this recent episode. | 10:11 | |
But if we go back, easy money in '65. | 10:13 | |
Tight money in term of stepping on it from March '66, | 10:18 | |
April '66 on, for the next six months or so. | 10:21 | |
The delayed effect of the earlier easy money, | 10:26 | |
plus the short run effect of the very tight money, | 10:29 | |
working in the same direction to raise interest rates, | 10:32 | |
which is what produced the famous credit crunch | 10:34 | |
of 1966. | 10:37 | |
- | Yes. | |
- | But what was the peak of that? | 10:39 |
The peak of that was in September. | 10:40 | |
Well if we count out from about March or April, | 10:42 | |
we find, let's say March to April, May, June, July, | 10:45 | |
August, September, it's six months. | 10:49 | |
In September, interest rates peaked and started to go down | 10:52 | |
even though the Fed continued a very slow rate | 10:55 | |
of monetary increase until December of '66. | 10:58 | |
And so that was what happened after '66, | 11:02 | |
was that the long range effect of the tight money | 11:05 | |
was now coming into play. | 11:08 | |
Well I believe again, this episode is very similar | 11:10 | |
to that episode. | 11:14 | |
And that the present peak in interest rates, | 11:16 | |
the present near crunch, is probably duplicating | 11:20 | |
what happened in September of 1966. | 11:26 | |
- | You used the term climactic a little while ago. | 11:28 |
Would you consider this most recent increase | 11:30 | |
a climactic move. | 11:34 | |
- | Well that's right. | 11:35 |
That's why I'm comparing it to the September '66 move. | 11:37 | |
The September '66 move as you quite properly say | 11:39 | |
was climactic in the sense that it was followed | 11:42 | |
shortly there by a decline. | 11:45 | |
I shall be very much surprised if in the next six months | 11:47 | |
the long term interest rate does not decline | 11:52 | |
from where it is now and prices improve, | 11:55 | |
bond prices improve. | 11:57 | |
I hasten to say, that's a statement for the relatively | 11:59 | |
near future, for six months. | 12:02 | |
Because what happens over the next two or three years, | 12:04 | |
depends on things that have not yet been | 12:07 | |
coming to the surface, that is. | 12:11 | |
As I've emphasized over and over again, | 12:13 | |
the main reason why interest rates are so high, | 12:15 | |
in nominal terms, is because people anticipate inflation. | 12:17 | |
They are high in nominal terms, they are low in real terms. | 12:22 | |
An 8% interest rate, when prices are rising | 12:25 | |
at 5%, means a 3% real cost. | 12:28 | |
Well, so from the long run point of view, | 12:32 | |
from the point of view of two, or three, or four years, | 12:35 | |
I think the trend of interest rates is still up. | 12:37 | |
And the only thing that will bring it down | 12:40 | |
is a successful policy of slowing down inflation. | 12:42 | |
But for the next six months, which is a much shorter | 12:46 | |
period of time, you've already got much more evidence, | 12:50 | |
'cause you've got the monetary experience | 12:52 | |
of the past six months, so you're in a position right now | 12:54 | |
where it seems to me | 12:57 | |
you've got reasonably good expectations that, | 12:57 | |
at least as a short run, as a short run matter, | 13:01 | |
long term interest rates are gonna decline and not go up. | 13:04 | |
- | Dr. Friedman, this action by the commercial bankers | 13:08 |
on the prime rate, gave rise to a press conference | 13:10 | |
at which the Secretary of the Treasury, Mr. David Kennedy, | 13:14 | |
made a remark that was interpreted as least | 13:19 | |
as indicating that wage and price controls would be | 13:21 | |
resorted to if necessary, to control inflation. | 13:25 | |
- | As reported in the newspapers, | 13:32 |
that was a most unfortunate remark. | 13:34 | |
And it's hard to know exactly what Mr. Kennedy said, or did. | 13:36 | |
As you know, if you're before one of these congressional | 13:40 | |
committees, there are some members of it | 13:43 | |
who are extremely persistent in dragging out statements | 13:44 | |
that they hope and expect to be embarrassing. | 13:49 | |
- | Yes indeed. | 13:52 |
- | I am sure that some members of that committee | 13:53 |
kept pressing Mr. Kennedy and saying, | 13:56 | |
now Mr. Kennedy if, if, if, what then? | 13:58 | |
Mr. Kennedy finally said, well what then, | 14:04 | |
we'll have to consider all alternatives. | 14:07 | |
And the man probably said now among these alternatives | 14:08 | |
do you include? | 14:11 | |
Then Mr. Kennedy said, well wage and price controls | 14:13 | |
surely have to be counted as one of the feasible, | 14:15 | |
possible alternatives and we'll have to study everything. | 14:17 | |
I'm, I'm, there are two comments that it seems to me | 14:20 | |
it's worth making on this. | 14:24 | |
The first has nothin' to do with wage and price controls. | 14:26 | |
It has to do with the frenetic campaign | 14:28 | |
that the administration is now mounting in order to get | 14:32 | |
the surtax continued. | 14:35 | |
They're running scared. | 14:36 | |
They believe that they, there's opposition to the surtax. | 14:37 | |
I personally happen to think this is undesirable, | 14:41 | |
although I can understand and sympathize | 14:45 | |
with what's going on. | 14:48 | |
As you know, I personally think that the major effect | 14:50 | |
of the dropping of the surtax would simply be, | 14:55 | |
that there would be less, slightly more upward pressure, | 14:58 | |
or less downward pressure than otherwise | 15:01 | |
on interest rates in the short term. | 15:04 | |
And then in the long term, it would mean | 15:06 | |
that government expenditures would be lower. | 15:08 | |
And just as I personally was opposed to the imposition | 15:10 | |
of the surtax, so I | 15:14 | |
continue to be opposed to it | 15:17 | |
and believe it will be a good thing if it were to, | 15:19 | |
if it were to terminate and to end. | 15:22 | |
In fact, again sort of a digression on a digression, | 15:24 | |
one of the most phenomenal things to me | 15:28 | |
is to see groups of businessmen, coming and pleading | 15:30 | |
and urging that taxes be held high. | 15:33 | |
Seems to me a reversal of every one of their typical | 15:35 | |
positions and an incredible spectacle | 15:38 | |
of the triumph of ideas over interests. | 15:42 | |
It happens I believe these are wrong ideas, | 15:45 | |
but nonetheless, it's a triumph of ideas over interests. | 15:47 | |
Going back into the administration's position, | 15:54 | |
I can understand very well, their position. | 15:57 | |
While I happen to have this particular view | 16:00 | |
about the surtax, the bulk of professional opinion | 16:03 | |
does not go as far as that, popular opinion does not, | 16:08 | |
it is widely believed that fiscal policy, | 16:12 | |
to put it in its mildest form, an important | 16:15 | |
complement at least to monetary policy, | 16:19 | |
if not the major movement. | 16:22 | |
And therefore, if I were responsible as a member | 16:24 | |
of the administration, I would undoubtedly say, | 16:27 | |
it is safer to try to move on both of these fronts. | 16:30 | |
Then maybe the Chicago school people are right, | 16:34 | |
and maybe they're wrong, and if they're wrong | 16:38 | |
what harm does it do to move on both fronts. | 16:40 | |
So I can understand the political imperative | 16:41 | |
and sympathize with the political pressure, | 16:45 | |
which leads the administration to say, | 16:47 | |
we must keep the surtax up as a way to keep pressure | 16:49 | |
on inflation, at the same time that we continue | 16:52 | |
to encourage the Federal Reserve Board | 16:54 | |
and their rather tight money policies. | 16:57 | |
And this is reinforced | 17:00 | |
by the extreme | 17:01 | |
short time reference of political observers | 17:04 | |
and of people in the market and so on. | 17:09 | |
Here it's five months since you had tighter money | 17:11 | |
and nothing seems to be happening. | 17:15 | |
And you wanna keep on the pressure. | 17:17 | |
And people are getting a little frenetic | 17:18 | |
and a little frantic. | 17:21 | |
It's very hard to have the patience as you should have | 17:22 | |
and say, well we know there's lag in these matters | 17:25 | |
and things are gonna come all right. | 17:28 | |
But that's a kind of a position which is very hard | 17:29 | |
for the politician, who has to face congressmen | 17:33 | |
day after day, to adopt that kind of an attitude. | 17:36 | |
So I can understand their pressure for the surtax. | 17:41 | |
Well that's one remark. | 17:44 | |
While I understand their pressure, I think it would be | 17:48 | |
a very good thing for them and for all of us | 17:50 | |
if in fact it didn't pass. | 17:52 | |
But the second thing I come to is Mr. Kennedy's comment | 17:54 | |
about wage and price controls, | 17:57 | |
because I think that's most unfortunate and I do not believe | 18:00 | |
there's a ghost of a show that this administration, | 18:04 | |
will in any reasonably short time period | 18:06 | |
be pushed to wage and price controls. | 18:08 | |
But I think it has a very important lesson to teach. | 18:10 | |
People raise the question all the time, | 18:14 | |
what's wrong with inflation? | 18:15 | |
And in a way it's harder to answer that question | 18:18 | |
than one might off hand think. | 18:20 | |
Because almost all of the naive statements about inflation | 18:22 | |
are wrong, about the harm inflation does. | 18:25 | |
What happens in this case, as in so many cases, | 18:27 | |
is that people tend to look at one side of the picture | 18:30 | |
and not at the other side of the picture. | 18:33 | |
Anybody who sees his price goes up, the price at which | 18:35 | |
he sells something go up, says well that's my just due. | 18:38 | |
The man whose wages go up, I'm entitled to that, | 18:41 | |
of course I'm worth more. | 18:43 | |
On the other hand, when he sees the price of something | 18:45 | |
that he buys goes up, he says oh that's terrible inflation. | 18:47 | |
It's impoverishing me. | 18:51 | |
And so you have all of this talk about how rising prices | 18:52 | |
hurt the working man. | 18:56 | |
Well they may or they may not. | 18:58 | |
In fact in practice, the working man's income | 19:00 | |
has been keeping up with rising prices. | 19:04 | |
Inflation has been raising wages | 19:06 | |
and it has also been raising the prices. | 19:08 | |
Insofar as the working man has done relatively poorly | 19:10 | |
in the past three years, which he has done, | 19:13 | |
it's not because of the rising prices, | 19:15 | |
it's been because primarily the rising taxes. | 19:18 | |
What's happened to the working man is that his | 19:21 | |
take home pay in real terms has remained | 19:23 | |
roughly constant, or gone down a little | 19:25 | |
in the last three years, because his rise in wages | 19:27 | |
has been roughly matched by the rise in prices | 19:31 | |
and on the other hand however, taxes have gone up | 19:33 | |
and eaten away what would ordinarily | 19:36 | |
be an increment to his income. | 19:37 | |
So the argument, similarly the argument that, | 19:40 | |
that rising prices, inflation, hurts the, | 19:44 | |
hurts the creditors, hurts the lenders | 19:50 | |
and benefits the borrowers, has an element of validity, | 19:53 | |
but it only applies to an unexpected inflation. | 19:57 | |
When you first get started, it is true, | 20:01 | |
that interest rates having been set on the basis | 20:04 | |
of an earlier expectation of stable prices, | 20:06 | |
the debtor is benefited and the creditor is hurt, that is. | 20:09 | |
Anybody who bought a bond at a price | 20:15 | |
with a yield of 4% is now in a very difficult position, | 20:19 | |
because in fact, | 20:24 | |
because of rising prices that 4% yield is a minus yield. | 20:26 | |
He got 4%, but by the time we took away, | 20:30 | |
let's say in the last year a 5% price rise, | 20:34 | |
he's 1% behind the bond. | 20:36 | |
In fact the situation is even worse, | 20:37 | |
because he has to pay taxes on that 4%. | 20:40 | |
And so if a man bought a bond at 4%, | 20:42 | |
for a $4.00 yield, let's suppose | 20:45 | |
he's at a 50% tax bracket, he ends up with $2.00. | 20:47 | |
But prices have gone up 5% | 20:51 | |
and therefore he really has loaned money | 20:54 | |
at a -3% yield for him. | 20:56 | |
But that's a, that's a transitional matter | 20:59 | |
as we're now seeing. | 21:01 | |
As soon as people come to anticipate the inflation | 21:02 | |
and expect the inflation, we have situation | 21:04 | |
like we have it now, where interest rates rise | 21:07 | |
very rapidly, so the lender's getting 8%, | 21:11 | |
which means that if inflation goes 5% | 21:15 | |
he's getting 3%. | 21:18 | |
Though again if I really took the tax effects into account, | 21:19 | |
the situation is worse. | 21:22 | |
'Cause if he's receiving 8%, he has to pay tax | 21:24 | |
on the whole 8%. | 21:27 | |
If he were in the 50% bracket, | 21:29 | |
he's paying four percent in tax. | 21:32 | |
So a lender who received 8% last year, | 21:34 | |
was in a 50% bracket, really got a negative yield | 21:37 | |
of 1% on his money, because the 4% that was left | 21:42 | |
had to be matched against a 5% price decline. | 21:45 | |
So as yet we still, this is why I keep on saying | 21:48 | |
that while interest rates appear high, | 21:51 | |
they really aren't high given the rate of inflation. | 21:53 | |
They are only high in the context of a future | 21:55 | |
in which you have a lower rate of inflation. | 21:58 | |
Well go back. | 22:01 | |
So the harm which, in discussing the problems of inflation, | 22:03 | |
I think there are two distinctions that are crucial. | 22:07 | |
One distinction is the one I've already been making, | 22:10 | |
between anticipated and unanticipated inflation. | 22:12 | |
It's a shift from one degree of inflation to another | 22:16 | |
that in the interim causes problems, | 22:19 | |
but also achieves what people regard | 22:22 | |
as the good things from inflation. | 22:24 | |
It's because interest, inflation went up | 22:26 | |
and people didn't expect it, so borrowers were getting | 22:30 | |
funds at abnormally low rates, so wages were not adjusting | 22:34 | |
fully for inflation, it's because of this | 22:37 | |
that you have a kind of an artificial boom. | 22:39 | |
This is what make inflation appear to be stimulating, | 22:41 | |
but it's also what does the harm | 22:45 | |
through the unexpected things. | 22:46 | |
Once everybody expects it, well then whether you're going | 22:48 | |
at 5% per year, or 10% a year, | 22:51 | |
so long as everybody expects it | 22:53 | |
and is adjusted to it. | 22:54 | |
There are a few people who are hurt, | 22:56 | |
but also it doesn't have any stimulating effect. | 23:00 | |
And it does some economic harm for reasons which are, | 23:03 | |
as I say, much more sophisticated than those ordinarily | 23:06 | |
considered, but not a great deal of harm, | 23:09 | |
so long as the inflation is within moderate bounds. | 23:11 | |
But this brings me to the second point. | 23:14 | |
I say first distinction is anticipated and unanticipated. | 23:16 | |
The second distinction, and in my opinion, | 23:19 | |
the most important distinction, is between open inflation | 23:22 | |
and repressed inflation. | 23:26 | |
This is where I'm coming back to Mr. Kennedy's | 23:27 | |
wage and price controls. | 23:29 | |
What I've been describing before was an open inflation. | 23:32 | |
By that I mean, that under inflationary pressure | 23:35 | |
prices and wages are free to move. | 23:38 | |
They're free to rise in response | 23:40 | |
to that inflationary pressure. | 23:43 | |
So wages do in fact rise at 5% a year | 23:44 | |
if prices in general are rising, or at 8% | 23:46 | |
to allow for productivity. | 23:49 | |
But now you come to a situation of a repressed inflation. | 23:51 | |
Whenever you have such an open inflation of the modern world | 23:55 | |
there is enormous pressure on the, | 23:59 | |
there's enormous pressure on the powers that be, | 24:04 | |
to stop the inflation, | 24:07 | |
not by the standard and orthodox procedures | 24:08 | |
of monetary policy, or fiscal policy, | 24:11 | |
but by legislating limits on prices. | 24:14 | |
Now many of our subscribers will have experienced | 24:20 | |
this in one form. | 24:24 | |
And that is in the usury laws on interest rates. | 24:26 | |
You have had in state after state | 24:29 | |
the business of raising the usury limit from 6% to 7% | 24:33 | |
and I gather the state of Illinois right now, | 24:37 | |
the usury limit is 6%, | 24:39 | |
that's for private individuals, | 24:41 | |
there's no usury limit on corporations. | 24:43 | |
But as a result there's no mortgage money | 24:45 | |
to be obtained because nobody's willing to lend money | 24:47 | |
on mortgages at 6%. | 24:49 | |
And so unless you can find some way to get around the law, | 24:51 | |
which of course you can, because there are always | 24:53 | |
devices for doing so, mortgage money will dry up. | 24:55 | |
Well this is a particular example of the tendency | 24:59 | |
to try to meet inflation, not by getting at its roots, | 25:04 | |
but by suppressing its symptoms. | 25:09 | |
That's why I call it suppressed, or repressed inflation. | 25:11 | |
Now the most extreme form of this is when you have | 25:14 | |
overall price control and wage control, | 25:16 | |
as we did in World War II, or as, | 25:19 | |
and as many other countries did. | 25:21 | |
Now it's the repression of the inflation | 25:24 | |
which does the most harm. | 25:26 | |
And in my opinion, the major harm from inflation, | 25:28 | |
the major reason it's desperately important | 25:33 | |
to avoid it, is because once you get the inflation | 25:35 | |
it is almost impossible, completely to prevent | 25:38 | |
the attempt to repress the inflation | 25:41 | |
by holding wages and prices down artificially. | 25:44 | |
Now why does that do enormous harm? | 25:46 | |
That does enormous harm because if you suppress | 25:49 | |
wages and prices, if you say they must be held down | 25:53 | |
artificially, below the level that declare the market, | 25:57 | |
then there is no mechanism to allocate scarce labor, | 26:01 | |
or scarce goods, among the people who wanna buy 'em. | 26:05 | |
You are throwing out of the window as it were, | 26:09 | |
the price system, which is the most effective device | 26:12 | |
we have for organizing economic activity. | 26:15 | |
Well something has to fill the breach. | 26:17 | |
If you're, if let us say, people wanna hire more labor | 26:20 | |
than there is labor employed, then what's gonna determine | 26:24 | |
who gets those scarce laborers? | 26:26 | |
It may be that the people who are most successful | 26:29 | |
in finding indirect ways to raise wages, | 26:32 | |
or it may be accident, or favoritism, or chance, | 26:34 | |
but sooner or later, there will be great pressure | 26:39 | |
for the government to step in and allocate that labor | 26:41 | |
because there's nothing else that's doing it. | 26:45 | |
The same thing if there's more copper, | 26:47 | |
there's less copper available than people wanna buy. | 26:49 | |
In the free market the price would go up | 26:51 | |
and now you have price controls which hold it down. | 26:53 | |
Who decides who gets the scarce copper? | 26:55 | |
It's gonna be accident, or favoritism, | 26:58 | |
but sooner or later there will be enormous pressure | 27:00 | |
for government rationing and government allocation. | 27:02 | |
We have much evidence on the malevolence | 27:05 | |
of this kind of activity. | 27:09 | |
If you go back to our own experience in World War II. | 27:10 | |
We could go back to the experience of Britain, or Germany. | 27:13 | |
The thing you find is that in a circumstance | 27:16 | |
where there is substantial inflationary pressure, | 27:20 | |
the attempt to repress it by holding down | 27:23 | |
particular wages, or particular prices, | 27:26 | |
causes enormous inefficiencies, enormous corruption | 27:28 | |
and great unrest. | 27:32 | |
And that's why I hope the administration will be | 27:34 | |
firm in its resolve, which it has stated over and over again | 27:37 | |
to avoid wage and price controls, to have nothing | 27:41 | |
to do with them and to attack inflation | 27:43 | |
the way it should be attacked, | 27:46 | |
by going at its base, sorry, causes | 27:48 | |
and not looking at its manifestations. | 27:51 | |
- | Thank you very much Dr. Friedman. | 28:00 |
Remember subscribers, if you have questions, | 28:02 | |
or comments, or suggestions for topics | 28:05 | |
you would like to hear discussed in this series, | 28:07 | |
please send them to Instructional Dynamics Incorporated, | 28:10 | |
166 East Superior Street, | 28:14 | |
Chicago, 60611. | 28:17 | |
This is William Clark. | 28:20 | |
Dr. Friedman will be visiting with you again soon. | 28:21 |
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