pstau001219001.wav / Tape 27 - Businessmen and Inflation, Bond Market, Harry Schultz Letter / Duke Digital Repository

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Hello, this is William Clark of the Chicago Tribune

0:02

welcoming you to another visit

0:05

with the distinguished economist, Dr. Milton Friedman,

0:07

welcoming you, of course,

0:10

on behalf of Instructional Dynamics.

0:11

Dr. Friedman, I've talked recently with a number

0:13

of businessmen who are very much discouraged

0:16

about inflation.

0:19

They hear comments that it's controlled,

0:22

if it is controlled at all, by the monetary authorities

0:24

and they feel that there's virtually nothing

0:28

that they can do.

0:30

They ask the question, "What can we,

0:31

"as individual businessmen do about inflation?"

0:34

Is there an answer for them?

0:36

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Yes, I think the answer is there's not a thing

0:38

they can do or that there's not a thing they really

0:40

should do as individuals.

0:42

The government, which is responsible for providing

0:45

a stable monetary framework, always, of course,

0:48

tries to shift the blame.

0:50

If there's inflation, the government has a strong tendency

0:52

to say, "Oh, we're not to blame.

0:55

"The reason are these greedy businessmen

0:56

"who are pushing for higher prices

0:58

"and the grasping union leaders who are trying

1:00

"to get higher wages."

1:03

But that's all excuse and not reason.

1:04

An individual businessman contributes his,

1:08

makes his greatest contribution to society

1:12

if he tries to produce the goods he's producing

1:15

as efficiently and effectively as possible,

1:18

gets them in the hands of the people who wanna buy them,

1:20

sells them at whatever price market will bear.

1:23

If there's a strong demand for his goods,

1:26

so that his price is high and he's making a profit,

1:28

that encourages other people to go into business

1:31

in competition with him

1:33

and that's what really serves the social good.

1:34

(coughs) As to the behavior of the price level in general,

1:38

the overall price level, that is not really determined

1:42

by what a particular businessman does about his prices.

1:45

That's determined by what the government does

1:49

about the quantity of money that it pumps into the society,

1:51

by how much money the Federal Reserve creates

1:54

or how much the treasury issues.

1:56

The best thing the businessman can do,

2:00

from that point of view is as a citizen,

2:01

to urge upon the government, which in this case does mean

2:03

the administration of the monetary authority,

2:08

a policy of restraint in monetary creation,

2:11

a policy of restraint in governmental expenditure,

2:16

a policy of providing a stable climate

2:19

for business to operate.

2:22

In particular, I think one of the most important things

2:24

a government could do and that it has not done,

2:26

is to explain in advance, what it's doing, to make clear

2:30

to the businessman what its policy is.

2:33

This is true in a broad way and it's true in a specific way.

2:35

It's true in a broad way, in the sense that I believe

2:38

it is highly desirable for an announced rule

2:42

to exist about monetary policy.

2:45

The rule I happen to have favored is a steady rate

2:47

of increase in the quantity of money

2:50

at something like 5% a year.

2:51

One reason why I favor that kind of rule is

2:53

because it enables a businessman to have

2:57

a stable background on the basis of which to plan.

3:00

He knows what's going on aside from his other virtues.

3:02

But in more detailed ways than that.

3:06

I must say, one thing that baffles me,

3:08

for example, is a kind of secrecy

3:11

that the Federal Reserve Board attaches to its operations.

3:13

As you know, every three weeks,

3:16

the Open Market Committee meets,

3:17

every three weeks they issue a directive to their people

3:19

who run the desk in New York indicating

3:22

what their policy should be.

3:25

Those directives used, in the past, they were not public

3:27

for an indefinite period of time.

3:32

Then, finally, there was a,

3:34

partly as a result of Congressional pressure

3:36

and I believe, maybe even, a Congressional legislation.

3:38

It was required that they be published once a year

3:41

or sometimes after the event.

3:44

Now the directive is published 90 days later,

3:46

it's published with three months lag.

3:49

Now, I see no reason whatsoever

3:51

why the Federal Reserve should not immediately

3:53

it issues the directive to New York also make it public.

3:56

I do not see why the people of the United States

3:58

are not entitled to know what is the policy

4:00

that the Federal Reserve is following with respect to money.

4:03

I must confess that to read those directives is

4:07

a bit like reading, like deciphering a Chinese puzzle

4:08

(others laugh)

4:13

because they are written in such cryptic terms

4:14

in order to conceal as much as possible as what's going on

4:18

that you have to become an expert in reading them.

4:20

But there are experts around who would translate them

4:22

if they were made available.

4:24

Instead, after every open market meeting,

4:26

there's a buzz of speculation,

4:28

there are rumors that get around,

4:30

very shortly it becomes apparent

4:31

if there's any change in policy

4:33

by what the Fed does in the market

4:34

and the whole operation, it seems to me,

4:36

only serves to reduce public faith and confidence

4:39

in government, to promote rumor spreading,

4:41

to give the impression that there insiders

4:44

and outsiders and I see no purpose whatsoever

4:46

in keeping it quiet.

4:48

But, I'm getting a little way away from your

4:49

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From the businessman

4:51

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from the

businessman, I think there's very little he can

4:52

or should do as an individual except to try

4:55

to make his best estimates of the future,

4:58

adjust his businesses accordingly, and continue his pressure

5:00

on government to provide a stable monetary framework.

5:04

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And that pressure can be exercised how?

5:06

The old way of write your congressman?

5:08

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Well, I'm no political expert on that.

5:11

I'm sure the people who are listening to this

5:12

know better than I do how to exercise pressure.

5:15

(William laughs)

5:17

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Dr. Friedman, this suggests that perhaps we oughta

5:19

check up on whether or not there've been any changes

5:21

since we last talked in the monetary situation.

5:23

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Well, it was two weeks ago now that we talked

5:27

and since then, I think what we can say is

5:29

that the basic, underlying situation continues unchanged.

5:31

There has been no apparent shift in monetary policy.

5:37

You have a continued, relatively slowly

5:42

and greative increase in the quantity of money.

5:44

Indeed, the figures for May, when they finally

5:46

become available, will show that the rate of increase

5:50

in the quantity of money, whether interpreted narrowly

5:53

or broadly provided you exclude CD's,

5:57

at that rate of increase from December to May will probably

6:00

be at a rate of about 2% per year.

6:03

This is lower than the apparent rate of growth

6:05

from December to April, but you will recall

6:08

that there was this incredible, unexplainable bulge

6:10

in the figures in April, which has since been ironed out

6:13

and you're now back more or less on course.

6:16

And so, I think you can say, roughly speaking,

6:18

that monetary growth continues

6:21

at a rate of about 2% per year.

6:22

In my opinion, this is too low a rate of growth,

6:24

from a long run pull and it promises,

6:27

therefore, a somewhat sharper slowdown

6:29

than it seems to be would be desirable.

6:31

Now, this keeps on sounding week after week

6:33

as pie in the sky, by and by, and so it is.

6:37

We just had released the results

6:40

of the price index for April,

6:44

that price series for April still showing

6:47

a very, very rapid rate of price increase.

6:50

You will recall that from February to March,

6:53

the increase was at the rate of about 9.6% per year.

6:56

From March to April, it was still at the incredible rate

7:01

of 7.2% per year.

7:03

So as yet, the price indexes,

7:06

the rates of growth of nominal GNP show very little sign

7:11

of a slow down that we have been confidently predicting

7:14

will follow this tight money policy.

7:17

But I wanna emphasize what I have before.

7:19

As yet, there is no inconsistency between the behavior

7:22

of these magnitudes and what past experience

7:26

would lead us to expect.

7:28

I mentioned that the price figure is for April,

7:30

the turnaround monetary policy started in December.

7:34

December to April is four months.

7:37

On the average, the lag between the change

7:42

in monetary policy and the effect on nominal national income

7:46

averages about six months, so four months is too soon

7:50

for it to show up.

7:53

I say it averages six months, sometimes it's been

7:55

as little as three months, but sometimes it's been

7:57

as long as nine or 12 months.

8:00

So there is nothing unusual, nothing unexpected,

8:02

nothing out of the typical pattern of behavior

8:08

in the action of the economy and consequently

8:11

I still think one can have very real confidence

8:14

that that there will be downward pressure,

8:17

that there will be downward pressure on the rate

8:19

of GNP growth, which will manifest itself initially

8:21

very largely in real output and some increase

8:25

in unemployment, some slow down in real output,

8:28

but then very shortly thereafter also,

8:31

in a slow down in prices.

8:33

One thing is clear--

8:36

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This year sometime?

8:37

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Oh, yes, oh, yes.

8:38

In fact, I think we oughta start seeing the effects

8:40

in a month or two, not very far from now.

8:43

One thing is interesting, some time ago,

8:46

in a talk which he gave, Herbert Stein,

8:47

one of the members of the Council of Economic Advisors,

8:50

made the comment that I found rather interesting,

8:52

that what people were now asking was a question

8:58

of when will inflation slow down?

9:02

And this is a sharp switch from the questions

9:05

they were asking about a year ago,

9:08

which is will inflation slow down,

9:10

or is it going to increase?

9:12

And I think that one thing has happened

9:14

and that is that the continued tightness

9:16

on the monetary side, plus the continued stress

9:19

by President Nixon on the desirability

9:23

of having a surplus in the budget,

9:27

whether you believe this really has much influence

9:28

on the course of economic events,

9:31

on the interest rate or not,

9:33

have produced a substantial belief on the part

9:35

of the public at large.

9:39

It's only a question of time,

9:42

that the determination is there to break the inflation,

9:44

and that it's only a question of when

9:46

that determination becomes really effective.

9:48

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Dr. Friedman, some of the gloomiest people I talked to

9:51

are those in the bond business and, of course,

9:54

there's been a good deal written recently about condition

9:57

in the bond market, people are pretty discouraged.

10:01

I wonder if you'd care to comment on the bond market.

10:03

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Well, once again, this is right on schedule

10:06

in terms of past experience.

10:09

You'll recall that in the past the experience has been

10:11

that when money tightens in the sense of a slower rate

10:14

of growth, it's initial impact

10:17

on interest rates is to raise them,

10:20

to drive down the prices of government securities.

10:22

However, this effect, on the average, has lasted six months,

10:26

the same magic six months we were talking about before.

10:30

It turns out to be the same

10:33

and the reason it's the same is not an accident.

10:34

The reason it's the same is because what reverses

10:37

this trend towards higher interest rates

10:40

is a decline in the demand for loans.

10:42

What produces a decline in the demand for loans

10:45

is a slowing down in the rate of GNP growth.

10:48

So it's understandable that the time delay

10:51

between monetary tightness and a reversal of the effect

10:54

on interest rates is roughly the same as the time delay

10:58

between the onset of monetary tightness

11:01

and the onset of a slowdown in the economy.

11:04

Because when the economy starts to slow down,

11:06

when incomes starts to increase less rapidly,

11:08

this means that the demand for loans on the part

11:12

of business enterprises seeking to expand,

11:16

the demand for loans on the part of businesses

11:18

holding inventories and so on,

11:21

all of this tends itself to be cooled off somewhat.

11:22

This reduces the upward pressure on interest rates

11:26

and tends to substitute a downward pressure

11:29

and that's why the lag is roughly the same

11:31

for interest rates, reversal interest rates,

11:34

and for a reversal of the rate of growth of GNP.

11:36

Well, let me go back to interest rates.

11:42

Given that you had a turn in December,

11:44

you did have a very rapid run up of interest rates.

11:47

Now, about a month and a half or two months ago,

11:50

there was temporary peak in long term rates

11:53

and I speculated on one of these tapes about whether

11:55

this time you were having

11:58

an abnormally short lead on interest rates.

11:59

Well, as things have further developed,

12:01

that doesn't seem to be the case.

12:03

What seems to be the case is that

12:04

what you were seeing there was the effect

12:06

of a sharp shift in the government's budgetary position

12:08

from a very, very large deficit a year ago

12:12

to a mild, well, in terms of seasonally unadjusted data,

12:15

a substantial rate of surplus now.

12:19

And so what you were seeing was a shift

12:22

from the government pulling funds out of the market,

12:24

to the government providing funds essentially.

12:28

And it appears now, looking back over that record,

12:30

as if it was this shift in budgetary position piled on top

12:33

of the tight money which caused what looked like

12:37

a temporary peak in interest rates, bottom end prices

12:41

to occur about a month and a half ago.

12:44

But since then, this tightness is continued,

12:47

then you have continued to have interest rates turn around

12:50

and go up.

12:53

Now if we take the normal timing of about six months

12:54

on the average, then start from December.

12:57

That means that May or June should see, roughly,

13:00

again I have to qualify all this by saying

13:04

these are not perfect, precise relationships,

13:06

there are some give and take,

13:08

you can be off a couple of months or so

13:11

one way or the other, but roughly around now,

13:13

or maybe a month from now, that somewhere in this interval

13:16

we should be seeing about the peak of interest rates.

13:19

If monetary tightness continues beyond that,

13:24

as this is manifested in a slowing down of the economy,

13:26

we should also see some tapering off in interest rates

13:29

and a rise in the price of long term government securities.

13:33

How long that will last depends, it's something

13:37

that we cannot say now because that depends not on

13:41

what has already happened in the monetary area,

13:43

but what is likely to happen in the future as well as

13:46

what happens in the fiscal area because the fiscal area

13:48

does effect the demand and supply for loans

13:51

and therefore the interest rates.

13:52

But at least for the, it's so often the case

13:54

that you have a more or less, what looks like

13:58

a climactic crash on the market just before

14:01

the market is ready to turn up and start it's upward move

14:05

in the stock market.

14:07

And the same thing is true in the bond market.

14:08

And my guess would be, although, with the usual scholarly

14:10

and academic qualifications, that that's more or less

14:16

what you may be witnessing now

14:19

or during the next month or so,

14:21

and the the likelihood is very, very great

14:23

that six months from now,

14:25

the prices of government securities will be higher

14:26

than they are now.

14:29

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Well, that should make some of my friends feel better.

14:30

Dr. Friedman, someone showed me a few days ago

14:33

a copy of a document called

14:36

the International Harry Schultz letter,

14:38

in which the writer, Mr. Schultz presumably,

14:41

accorded you considerable recognition

14:44

in an acid sort of way.

14:46

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Well that's uh,

14:48

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I wonder if you're familiar

with this?

14:49

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Well I'm familiar not with this particular thing

14:50

that he said in this letter,

14:53

but I'm familiar with the international

14:54

Harry Schultz letter.

14:56

I used to be on his mailing list for it,

14:58

but then I met Mr. Schultz in London

15:01

and we had a long talk about gold

15:03

in which he wrote me off as a hopeless cause.

15:05

(William laughs)

15:08

The letter is a rather interesting mixture

15:09

of all sorts of gossip and discussion,

15:12

much of it very well informed,

15:15

much of it shrewd, much of it very interesting,

15:17

which appears I guess once every week or so and is sent

15:19

to a rather substantial international mailing list.

15:22

I gather it's been very successful.

15:25

It has a general stance

15:27

of being one of the gold bulls

15:29

of the group of people who foresee collapse

15:35

of the international monetary system,

15:40

emergence of a higher official price for gold

15:41

and a great bull market in gold.

15:46

Now one of these days, that's going to pay off,

15:48

but it's been a long, long time coming, of course,

15:52

to some extent it's paid off on the part of the free-market

15:55

in gold which has risen substantially,

15:57

but these are the people who for about the last seven

15:59

or eight years have been saying

16:02

that a doubling of the monetary price of gold is

16:03

just around the corner.

16:05

And those who have been investing in gold

16:06

all that period from that point have not done so well.

16:08

The interesting thing about the view expressed is

16:11

that there's always in this kind of a view,

16:13

a very real element of validity to the basic position

16:16

that is taken.

16:20

But there's a tendency to not to recognize a subtlety

16:21

in the qualifications, to carry it to an extreme

16:26

and to expect things to happen much faster than they do.

16:30

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I thought it might be kind of fun and interesting

16:34

for your subscribers if you don't object

16:37

if I read you some of the things

16:40

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Oh no

16:41

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that people said,

and I expect you'll want to stop me and comment

16:42

as we go along.

16:45

He begins by saying that his preceding letter put

16:46

Milton Friedman in perspective just in time

16:49

for the reader to see his, your next day Geneva verbiage,

16:51

referring to your talk in Geneva in proper light.

16:56

Were it not that many are now quoting his talk

16:59

as though it were fact, I'd ignore it.

17:02

This says Mr. Schultz.

17:04

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Well you know, this is interesting comment.

17:05

Just look at the english of that.

17:07

Of course, the talk is fact.

17:08

I gave the talk

17:10

absolutely.

17:11

(both laugh)

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But he goes on, "Lest Nixon and company or the press

17:14

"be influenced, I must clarify," he says.

17:18

"An economist is not sound if he doesn't understand

17:22

"the role of gold and I feel that Friedman doesn't.

17:25

"He says the two-tiered system protects the dollar.

17:28

"Wrong.

17:30

"He forgets the two-tiered system is voluntary

17:31

"and restraint in buying United States gold is merely

17:34

"a gentleman's agreement."

17:38

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Well, let me stop you there.

17:39

When you say the two-tiered system is voluntary,

17:41

you have two tiers and one of those isn't voluntary at all.

17:45

The free market for gold in London exists.

17:49

The price of gold is not $35 an ounce,

17:52

it is something else.

17:54

I don't know what you can mean by voluntary,

17:56

but that what he means undoubtedly is that the second tier,

17:58

the agreement that the official agencies, the central banks,

18:03

treasuries will clear gold with one another

18:08

at the official price of $35 an ounce.

18:11

That's voluntary in the sense in which

18:14

it always has been voluntary, that any country that wished

18:16

could depart from it and any country that wished could raise

18:19

its own price of gold.

18:22

The US could technically speaking raise the price of gold.

18:23

Of course it would not do so without consultation

18:28

with the other countries.

18:30

So, there's a sense in which it's voluntary.

18:31

Now, my point has not been that the two-tiered system

18:35

protects the dollar.

18:38

My point, and I think he must have seen a newspaper story

18:40

and not the full text of what I said.

18:44

My point is very different.

18:47

It is that so long as we had a commitment to support

18:49

the price of gold to everybody in the market in London,

18:53

to private persons as well as public persons.

18:58

So long as we had that commitment and so long as we stuck

19:00

to that commitment, then we were subject to a run

19:03

from private people.

19:05

Private people could say, "Well, I'm gonna get out

19:07

"of dollars into gold."

19:09

And since we had a limited amount of gold to supply

19:10

that need we were always subject to a crisis in a run.

19:12

My point is that a freedom in price of gold means

19:16

that we have no commitment whatsoever

19:19

to provide gold to the London market and therefore

19:21

if private individuals want to get out of gold,

19:24

I mean out of dollars into gold.

19:28

If the people who read Mr. Harry Schultz's letter want

19:30

to speculate in gold and buy gold, they buy the gold

19:33

on the market, this drives up the price of gold,

19:37

but it doesn't do a thing to the US.

19:40

It just simply leaves somebody else holding the dollars

19:42

with which the gold is bought.

19:44

Mr. A had the gold before, and Mr. B had the dollars,

19:46

now it's reversed.

19:49

And now the next question is what is Mr. A going to do

19:50

with the dollars that he's newly gotten for his gold?

19:54

So, in a sense you could say it protects the dollar.

19:58

What it does is to eliminate a foolish threat to the dollar.

20:03

We had exactly the same problem when we were trying

20:07

to support the price of silver.

20:11

That produced a threat too and we had to give that up,

20:13

and we gave that up.

20:15

Now there's still a legal commitment or the understanding

20:16

to provide gold to central banks and official agencies

20:21

at $35 an ounce.

20:24

That is still there, with that respect we're

20:28

in the same position as we were before and so what I argued

20:31

in Geneva and what I've said elsewhere and on these tapes is

20:34

that that means that it's technically possible

20:37

for the official agencies to run gold.

20:40

It's possible for Germany, the Central Bank of France,

20:42

the Bank of Germany, and the Bank of Italy,

20:45

the Bank of England, if they had dollars to ask us

20:48

for gold, and since we only have a little over $10 billion

20:51

of gold, well they could principal run.

20:53

But there my argument has been that

20:55

that's their problem,

20:57

because if they try to run us we have a very simple answer.

20:59

We could simply shut the window and say

21:02

no, we're not gonna give them anymore.

21:04

If we do that, it's hard for me to see

21:05

that the US suffers from that.

21:07

The other countries would not like it as I've argued.

21:09

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Well, Mr. Schultz goes on reporting on your comments.

21:13

He says that you Dr. Friedman say the United States has

21:17

no balance of payments problem.

21:21

"That's too ridiculous", says Mr. Schultz, "to attack."

21:23

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(laughs) One of the things I always observe is

21:26

that when anybody uses that kind of a phrase in an argument

21:29

it means he doesn't know what the answer is.

21:33

If you really know what the answer is

21:35

you don't have to ridicule it, you give the answer

21:36

and the fact is the US, it just simply is a fact

21:39

that the US has no balance of payments problem,

21:42

except if it creates one for itself.

21:44

We can make ourselves a balance of payments problem

21:47

if we worry about it unnecessarily,

21:49

but we have no balance of payments problem in the sense

21:50

that there is no way in which any holders of dollars

21:54

anywhere in the world whether governments

21:58

or private people can force the US to take actions in order

22:01

to defend some balance of payments crisis.

22:06

If we had a commitment, if we were really going

22:09

to indefinitely, well that's a little too extreme

22:11

in the sense that the official holders of dollars

22:15

by asking us for gold could force us to take the position

22:17

of suspending our nominal agreement to provide gold

22:21

at $35 an ounce, closing the gold window.

22:25

I don't believe that's a balance of payments problem.

22:28

I believe that's a gold problem.

22:30

So it is true that we still could have a gold problem,

22:32

but we don't have a balance of payments problem

22:34

because again Mr. Schultz has to tell me,

22:36

what is it that holders of dollars elsewhere can do

22:38

with those dollars that requires, for example,

22:41

to impose an import on an import quota,

22:44

export subsidies, exchange control?

22:49

I see nothing.

22:53

The other countries may have a balance of payments problem.

22:55

The official agencies, in a sense Germany if it accumulates

22:58

too much gold, too many dollars has a problem.

23:02

What will it do with those dollars?

23:05

Britain if it doesn't have enough dollars to provide people

23:08

in reply to sterling has a balance of payments problem,

23:11

but under present circumstances

23:14

the US has no balance of payments problem.

23:16

-

Well, Mr. Schultz goes on.

23:20

He says, meaning Dr. Friedman, you say

23:21

that it doesn't matter how high the free market gold price

23:24

goes, it won't hurt the dollar.

23:27

And then Mr. Schultz makes the parenthetical comment,

23:29

"They say if you tell a big enough lie

23:32

"people will believe it.

23:34

"This one may qualify."

23:35

-

(laughs) Well, you know it seems to me one ought to look

23:37

at the substance of arguments and not the rhetoric.

23:41

And so far as that statement is concerned,

23:44

the difficulty with those statements is a failure

23:48

to specify what you mean by hurt the dollar.

23:50

People use this figurative language,

23:54

and you have to ask Mr. Schultz or people like that,

23:56

exactly what do you mean by hurt the dollar?

23:58

Let the price of gold go high enough, and this may mean

24:01

the people who have gold will make profits,

24:07

will make returns, this may mean that central banks may have

24:09

more of an incentive to ask for their $35 dollar gold

24:13

than they otherwise would, but if they know

24:18

as they will know that they won't get it.

24:20

I doubt very much it's gonna lead to its undoing.

24:22

And so I am baffled as to how he thinks

24:24

it will hurt the dollar.

24:27

-

Well he goes on.

24:29

He's saying and he's reporting, he's saying you Dr. Friedman

24:31

are saying in effect that people will have confidence

24:34

in an unbacked dollar which gets evermore diluted.

24:37

-

No, I don't believe I've ever said that.

24:42

On the contrary, I said explicitly at the Geneva talk

24:44

and I said it elsewhere that the present situation

24:48

in which the dollar is essentially the major currency

24:52

of the world in which the world is on a dollar standard,

24:55

that that situation is tenable for a long period provided

24:58

the United States follows a monetary policy

25:02

which produces reasonable stability in the domestic prices,

25:05

in the purchasing power of the dollar.

25:12

When I say reasonable stability, what I mean by that is

25:14

if the United States inflates at a relatively low rate

25:17

compared to the rate that other countries

25:21

throughout the world are going to want to inflate,

25:23

and by that I mean if we are able to keep inflation down

25:25

below about 3% a year, personally I would like to see us go

25:27

to 0% a year, but even if we don't succeed, if we keep it

25:32

down below to two or 3% that will make the dollar

25:35

a reasonable stable currency and that will mean that more

25:37

and more people throughout the world will be encouraged

25:40

to carry on their trade in dollars even though it's

25:43

between countries who's currencies are not dollars that is.

25:45

If it's maybe a trade between, let's say,

25:48

Austria and Denmark, but yet they may carry on that trade

25:51

be nominated in dollars because it is

25:55

the most convenient international currency.

25:57

On the other hand, if the United States followed

25:59

a substantial inflationary policy,

26:02

if we were to have a price rise at a rate of five or 10%

26:05

a year, or even if we didn't have an average price rise

26:09

of that, but if our prices sometimes went up sharply,

26:13

sometimes down sharply,

26:15

the people of the world would be driven to find other ways

26:17

of handling their international trade.

26:21

What would then happen is either

26:24

that some other vehicle currency would develop

26:26

like the German marc.

26:28

The US would still have no fundamental balance

26:29

of payments problem so long as it did not try to peg

26:32

the price of its dollar in terms of other currencies,

26:34

but it would no longer have whatever advantages accrue

26:38

from the dollar being used

26:42

as the major international currency of the world.

26:43

-

Oh, skipping a couple of nasty sentences in here, Doctor,

26:47

he closes with this, "Milton Friedman said in Geneva

26:50

"he wasn't speaking in any official capacity,

26:53

"but rather as an irresponsible academic.

26:55

"Those are his words.

26:58

"Milton Friedman is an expert on the fingers and toes

26:59

"of economics, but not the heart or the bloodstream."

27:02

-

Well, I'm glad he put in those words

27:05

about irresponsible academic because I stressed those

27:07

because I didn't want anybody to think I was speaking

27:10

at any other capacity

27:11

(William laughs)

than as an individual.

27:13

-

One of the things he said in the sentence I left out,

27:16

he referred you, compared you with another economist

27:19

who he says belittles his protagonist

27:21

and I just want to say I have never heard you use a device

27:24

of belittling your protagonist.

27:27

-

Oh, thank you.

27:28

-

Thank you very much Dr. Friedman.

27:30

May I remind our subscribers if you have questions

27:32

or comments or suggestions for topics

27:34

you would like discussed in this series,

27:36

please send them to Instructional Dynamics Incorporated,

27:38

166 East Superior Street, Chicago, 60611.

27:42

This is William Clark.

27:47

Dr. Friedman and I will be talking with you again soon.

27:48

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