Tape 17 - British Bank Rate, French Revolution / Paul A. Samuelson papers, 1933-2010 and undated / Duke Digital Repository

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Hello, this is William Clark,

0:02

Financial Editor of the Chicago Tribune,

0:03

welcoming you on behalf of Instructional Dynamics again

0:06

to this weekly series of commentaries

0:09

on current economic developments.

0:12

Reporting to you again will be one of the nation's

0:14

leading economists, Professor Milton Friedman

0:17

of the University of Chicago.

0:20

Dr. Friedman, I noticed that the British government,

0:22

in what was called a surprise move,

0:25

has raised the Bank of England's discount rate

0:28

a full percentage point to eight percent.

0:31

What does the relation between that discount rate

0:34

and what we think of as the discount rate

0:38

here in the United States, is it the same thing?

0:40

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It's not exactly the same thing.

0:43

There's been all along a difference

0:45

in the meaning of the discount rate

0:48

in the British financial structure and in ours.

0:51

The most important difference is that the British rate

0:54

has always been what's known as a penalty rate.

0:56

That is, the discount rate by the Bank of England

0:59

has always been higher than a market rate

1:01

on securities of comparable duration and risk.

1:06

That is, for example, in the American context,

1:10

the rate that is usually referred to in connection

1:13

with the discount rate is the Treasury Bill rate.

1:16

As an ordinary matter, the Treasury Bill rate

1:18

in the United States is higher than the discount rate.

1:20

The corresponding rate in the British market,

1:23

what would be the counterpart of the Treasury Bill rate,

1:25

in the British market has always been lower

1:27

than the British discount rate.

1:29

Now, the reason for that,

1:31

I don't mean the reason for that,

1:32

but the way in which that's worked is that

1:33

in Britain, the banks do not discount

1:36

directly from the Bank of England.

1:39

In the United States, it's the First National Bank

1:41

or Continental Illinois Bank that borrows

1:44

from the Federal Reserve Bank by discounting, that is,

1:47

by taking some notes of its customers to the bank

1:49

and getting a loan on that collateral.

1:55

In the British market, the banks themselves,

2:01

the commercial banks themselves,

2:04

do not borrow from the Bank of England.

2:05

There are what are known as

2:07

the dealers in the market, the bill dealers.

2:09

These are people who are not banks,

2:13

but are involved in buying and selling commercial paper,

2:16

and buying and selling government securities and bonds.

2:19

They are the ones who borrow from the Bank of England

2:22

and they in turn either lend to the commercial banks

2:25

or buy the paper from the commercial bank.

2:29

That is, if a commercial bank is pressed and needs money

2:32

it will as they say, go into the market

2:35

and by that they may not go to the bank,

2:37

but they will go to the bill brokers.

2:40

The bill brokers will then buy the paper,

2:41

buy the commercial paper or the bills

2:45

from the commercial banks or will lend the money.

2:47

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Do these bill brokers have any counterparts

2:49

in the United States?

2:52

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Yes, I suppose their nearest counterparts are the dealers

2:53

in government bonds and government securities

2:57

in the New York market, who are,

3:01

they are in a similar kind of position.

3:03

In the British situation, the bill brokers are ordinarily

3:06

borrowing from the commercial banks,

3:09

as well as lending to them.

3:10

That is, the ordinary situation

3:11

is that the bill brokers are borrowing

3:13

from the commercial banks

3:15

and then if the commercial banks need to have

3:17

those borrowings repaid,

3:18

the brokers will go into the bank,

3:20

will go to the Bank of England

3:23

and borrow from the Bank of England.

3:24

In our case, similarly as you know,

3:26

we have dealers in government securities

3:28

who ordinarily are carrying their inventories

3:31

on loans from the commercial banks,

3:34

but who in time of difficulty may make repurchase agreements

3:36

with the Federal Reserve Bank,

3:39

and that would be the direct counterpart.

3:41

However, in the British system as I say,

3:43

the idea has always been that borrowing,

3:46

that the discount window, as it were,

3:53

at the Bank of England is fully open.

3:55

There is no qualitative control on it.

3:58

Any one of these dealers, who has adequate collateral,

4:00

is free to come in and borrow,

4:05

without being examined for whether it's operating properly

4:07

or whether it's conforming to rules or not.

4:11

And as a result, in order to prevent loans

4:15

from being indefinitely large,

4:18

the rate has to be a penalty rate.

4:20

Otherwise it would be profitable to borrow

4:22

an indefinite amount.

4:24

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I see.

4:25

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In the U.S. when we first started on our system, way back,

4:26

for a variety of accidental reasons,

4:30

the Federal Reserve Bank, back in the 1918, 19, 20,

4:33

were charging a discount rate

4:39

that was below the market rate,

4:41

and therefore it did become very profitable

4:43

for banks to borrow on a very large scale.

4:45

That's why, as I've mentioned in an earlier

4:47

one of these tapes, member banks borrowings

4:49

at the Federal Reserve system in early 1920,

4:52

were the equivalent, in today's market, would be

4:56

the equivalent of borrowing 30 billion dollars from them.

4:58

And it was this episode that caused a change in the policy,

5:02

and led to the Federal Reserve instituting the policy

5:06

that borrowing is a privilege and not a right,

5:10

and therefore led to what is called

5:14

qualitative control or control over discounting,

5:16

window guidance as the Japanese call the

5:19

corresponding thing.

5:22

And thus our discounts are held down to where they are.

5:24

Currently less than a billion dollars,

5:28

a good deal less, not by charging a rate

5:30

which makes it unprofitable to borrow.

5:34

On the contrary, if you look at the market,

5:37

the discount rate now is about five and a half percent.

5:39

Is it five and a half percent?

5:42

I think that's right.

5:43

Whereas the federal funds rate,

5:44

which is an identical thing,

5:49

it's the rate that one bank pays to another

5:51

for loans, for a transfer of deposits

5:53

at the Federal Reserve system

5:57

has gone as high as something like

5:58

six and three quarter percent.

6:00

That is to say, it would have been profitable,

6:02

very profitable for any bank to borrow

6:06

from the Federal Reserve and lend it to other banks.

6:08

And the reason they haven't done so

6:11

is because of this qualitative component of control.

6:13

If any bank did so, the Federal Reserve Bank

6:17

would start talking to it and saying,

6:20

"Well, now you're not behaving quite properly,

6:22

"and we want you not to borrow so much."

6:24

This is a very funny thing, 'cause I've talked

6:27

time and again to Presidents of Federal Reserve Banks,

6:29

and tried to get a detailed picture

6:32

of just how they twist the arm of their customers.

6:33

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(chuckle)

6:36

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And, what I always get is that

6:36

they never have any trouble twisting the arm

6:37

but they never can describe in detail just how they do it.

6:39

But it's clear that what is involved is

6:42

that a bank does not want to be in a position

6:44

where, in case it gets into real trouble,

6:46

the discount window is difficult to access.

6:49

And consequently, banks are very careful

6:52

to maintain good relations with the Federal Reserve.

6:54

So, as I say, from this point of view

6:57

if you have an eight percent discount rate in London,

6:59

that is equivalent not to an eight percent

7:02

re-discount rate here, but to a much lower one.

7:05

I don't believe the difference would be as much

7:08

as a five-and-a-half to eight.

7:11

But the explanation for the rest of this difference

7:13

is that, of course, Britain has been having

7:15

great balance of payments problems,

7:18

they've been having more rapid inflation

7:20

than we have in this country.

7:21

They have, therefore, for some time past

7:23

been having higher interest rates inside Britain

7:26

than we have been having inside the United States,

7:29

and therefore, in that context, there is nothing abnormal

7:31

about their having an eight percent discount rate.

7:34

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Would the change in that discount rate, do you think,

7:37

have any bearing or influence toward a change in ours?

7:40

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Well, it has some, obviously.

7:45

The world capital market is, in many ways, a single market.

7:48

That is, it's highly interrelated.

7:52

What happens in one part of it affects the others.

7:54

But I do not believe that this would have

7:57

very much effect on our situation because,

7:59

first of all, Britain is no longer

8:02

a major part of the world capital market,

8:06

as it would have been 50 or 60 years ago.

8:09

The U.S. is now the dominant part

8:12

of the world capital market.

8:14

In the second place,

8:16

you have, while in the discounting area in Britain,

8:18

you don't have the kind of window guidance

8:25

that I've been speaking of, or qualitative control here,

8:28

you do have it in a different way.

8:31

Because, just because, the commercial banks, by tradition,

8:33

have not re-discounted at the Bank of England,

8:37

you can't bring control on them that way.

8:40

On the other hand, there has been an increasing development

8:42

in recent years, in Britain,

8:45

of qualitative controls over the banks

8:47

in the form of the Bank of England,

8:51

or some other governmental agency,

8:55

setting a limit on the amount by which commercial banks

8:57

are permitted to expand their loans.

9:00

There's been a direct control,

9:02

trying to keep down the expansion of loans.

9:04

And as a result, well, come back to the U.S.

9:06

Under present circumstances,

9:09

I don't believe the discount rate

9:10

is a very important instrument of policy.

9:11

What's much more important is how tight or easy

9:13

they are in granting re-discounts,

9:16

and far more important than that,

9:19

is their policy on open market operations,

9:22

buying and selling Federal securities.

9:24

Well in the same way in Britain,

9:27

the discount rate has more importance

9:28

than it has in the U.S., but it no longer is

9:30

the central keystone of their system.

9:34

I don't know if you remember

9:38

the famous statement by Walter Bagehot.

9:39

Walter Bagehot was the great English economist

9:42

who was simultaneously the editor of the London Economist,

9:44

a man who wrote on philosophy and politics,

9:50

and a man who wrote the, what is undoubtedly

9:53

the most famous work about central bank policy

9:56

called Lombard Street, the name of his famous work.

9:59

And in that book he discusses,

10:03

this is bank in the 1880s or '90s,

10:05

in that book or somewhere, where he is discussing

10:07

central bank policy, he says, a bank rate,

10:10

by which he means a discount rate, of seven percent

10:12

would draw gold from the moon.

10:15

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(laughter)

10:17

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In that period, when you had

10:18

none of these qualitative controls,

10:20

none of these restrictions,

10:22

a bank rate was undoubtedly the cornerstone of policy,

10:23

and an increase in the bank rate at London

10:27

would draw capital from all over the world.

10:30

And every time London had balance of payments problems,

10:32

in the sense that its gold reserve was going down,

10:34

the standard response was to raise the discount rate.

10:37

This would tend to drive the bill brokers into the bank,

10:40

this would raise the market rate,

10:45

this would make London an attractive place to invest funds,

10:47

and funds would come flowing from all over the world.

10:50

And that was what was in back of his statement,

10:52

about drawing gold from the moon.

10:55

Well that's not the situation now.

10:56

The bank rate, or discount rate, occupies a minor position

10:58

in the English financial structure,

11:02

just as our re-discount rate occupies a minor position here.

11:05

And the major position has been taken over in both countries

11:08

by a combination of open market operations

11:11

and more or less direct qualitative control on the banks.

11:14

And one more thing:

11:18

Qualitative control of this kind,

11:20

what sometimes I refer to as an open mouth policy,

11:23

as opposed to an open market policy,

11:27

is far more effective in Britain than it is in this country,

11:29

because, in Britain, you have something like

11:31

six major banks that control the whole banking system;

11:34

you have a nationwide branch banking system.

11:37

We have in this country, still, something like 15,000 banks.

11:44

You can get the heads of those six banks

11:49

into a pretty small room, but it takes a pretty big

11:50

auditorium to get our bankers in.

11:52

And as a result, this kind of informal understanding,

11:55

with the Bank of England dropping the word

11:59

to the heads of these banks, about what is desirable policy,

12:02

can be much more effective.

12:06

But none of this, I think, alters the fact

12:11

that basically the two structures are the same.

12:13

Going back to your point,

12:16

the reason for the rise of the discount rate in England,

12:18

is that England has been, like us, experiencing

12:20

very considerable inflationary pressure.

12:23

Consequently, this move is an internal move

12:28

designed to stop their inflationary pressure.

12:32

The more they inflate, in a certain way,

12:34

the easier it becomes for us,

12:37

on our policy, because that takes the pressure off

12:42

the balance of payments.

12:44

Remember, if one man's surplus is another man's deficit--

12:45

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That's right.

12:48

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If it's properly defined.

And vice versa.

12:50

So that I don't believe, myself,

12:51

that the British bank rate change, per se,

12:54

has any important influence on what American policy will be.

12:57

American policy is dominated, and must be dominated,

13:01

by the desire to slow down inflation in this country.

13:06

We have been moving at it, as we discussed last week

13:09

in more length, rather ineffectively,

13:12

and I'm not saying we will succeed in that policy,

13:16

but, that's what's dominating the policy,

13:19

not whether Britain raises a bank rate to eight percent.

13:21

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What you say suggests that the problems of

13:24

the two countries are not entirely dissimilar, however.

13:26

What are the economic debates in Britain?

13:30

Do they sound rather like those

13:34

that have been going on in the United States?

13:36

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Well, it's a very funny thing.

13:38

If you had gone back to the United States in the 1930s,

13:40

let's say 1935, you would have said,

13:44

if you want to know what the debate

13:46

in Cambridge, Massachusetts is in 1935,

13:48

find out what it was in Cambridge, England in 1933.

13:52

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(chuckle)

13:55

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But if today you were asked the question, and you said,

13:56

what is the debate going on in Cambridge, England in 1969,

13:58

you would say, what was the debate going on

14:01

in Cambridge, Mass. in 1966, and in Chicago,

14:03

if I may add a personal note, in 1963?

14:06

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Yes, indeed.

14:10

(laughter)

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So, instead of the trend being from Europe and England

14:12

to this country, it's been the other way.

14:16

Let me be much more specific and precise about that.

14:17

In the 1930s you had, Cambridge, England was,

14:20

unquestionably, the center of the academic economic world.

14:25

It was the place where economics was being made,

14:30

and from which it was being distributed

14:32

around the rest of the world, to put it in,

14:34

a little, somewhat, but not very extreme form.

14:35

This had been true for something like 50, 60 years,

14:40

ever since the reign of Alfred Marshall,

14:46

who was a great economist of his time, at Cambridge,

14:48

a great Cambridge economist,

14:51

followed by a whole series of great figures.

14:53

A.C. Pigou, Dennis Robertson, and of course,

14:56

Maynard Keynes, John Maynard Keynes.

14:59

And in the 1930s in particular,

15:02

when Keynesian economics was being developed at Cambridge,

15:04

it was spreading throughout the rest of the world,

15:07

and we were on the receiving end, the U.S.,

15:09

we were a backward country in the field of economic analysis

15:12

and had been for many years, influenced by the trends,

15:15

not only in England, but another aspect

15:19

of our economic development was influenced

15:20

by the trends in Germany.

15:22

We had a considerable number of our economists

15:24

who were trained in Germany,

15:26

got their degrees at German universities,

15:28

and came back to this country.

15:30

So-called institutional and historical

15:32

school in this country.

15:34

That was true in the 1930s.

15:35

But in the post-war period, the situation

15:37

has almost exactly reversed itself.

15:40

There is no question right now,

15:41

but that the United States is the center of work

15:43

in economic theory, economic analysis, and economic studies,

15:46

and Britain is in a backward state.

15:49

Now, all of us are aware that in this country

15:51

a major dispute has been going on, raging in this country,

15:53

between the so-called monetarists

15:57

and the so-called fiscalists, or between

15:59

the notion of the supply-of-money school

16:01

versus emphasis on fiscal policy.

16:03

Or, it's put in different ways, quantity theory school

16:06

versus income-expenditure school,

16:10

Keynesian versus non-Keynesian.

16:12

Now that battle was at a low tempo in this country

16:14

in the academic world, until about 10 years ago,

16:18

at which point it started to speed up,

16:22

and in the past eight or 10 years,

16:24

there's been not only a speeding up,

16:27

but a very, very real shift of opinion.

16:28

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In which you've played a very important role,

16:31

personally, Dr. Friedman.

16:33

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Well, thank you, I hope so.

16:34

(chuckles)

But at any rate, this dispute, or this change,

16:36

on the academic level has reached the public press,

16:41

only in the last year or two, when it got involved

16:45

in the argument about the surtax, and particularly,

16:48

more recently, when the surtax failed to deliver.

16:50

Now the interesting thing is, that if you go over to Britain

16:53

the academic dispute was very quiet, much beyond the point

16:56

at which it was quiet in the United States.

17:01

And it's really only in the past two or three years

17:04

that you're starting to get,

17:07

in the academic world in Britain,

17:08

exactly the same kind of a Keynesian, anti-Keynesian,

17:10

monetarist, fiscalist dispute that you had in this country.

17:14

It's being spearheaded in Britain, in part,

17:17

interestingly enough, by Harry Johnson,

17:19

who is a professor who spends half the year

17:22

at the London School of Economics,

17:25

and half the year at the University of Chicago.

17:26

Now, when he's at the University of Chicago,

17:29

he's representing the English Keynesians,

17:31

but when he's at the London School of Economics,

17:33

he's representing the American monetarists.

17:35

(laughter)

17:37

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He's a carrier.

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Yes, well no, oh, he's more than a carrier.

17:38

Harry Johnson is a very important economist

17:41

in his own right, he's done major work in the field,

17:44

particularly in international trade

17:47

and international theory.

17:50

But in this respect, he has been

17:51

something of a carrier and a catalyst.

17:53

In addition, in Britain, about a year or two ago,

17:55

in the course of all the British difficulties

17:59

about their balance of payments problems,

18:01

the International Monetary Fund had a mission,

18:04

which went to Britain, and studied British internal policy,

18:08

and it made some reports, which stressed, very heavily,

18:12

the extraordinarily rapid rate of expansion

18:16

of the quantity of money in Britain,

18:18

and the fact that this expansion in the quantity of money

18:21

was behind the developing inflation in Britain.

18:23

This was a view, which to begin with,

18:26

received very short shrift indeed,

18:28

from the British economists and commentators.

18:31

It did so partly, as I say, because of

18:33

this long Keynesian tradition.

18:35

Partly also, because of a so-called Radcliffe Commission,

18:37

which was a group set up in Britain,

18:43

oh, it must have been 10 years ago, for the purpose,

18:45

similar to our own Commission for Money and Credit

18:49

some years back, of a broad-scale survey

18:53

of the financial structures.

18:54

And under the influence of Professor Sayers

18:57

of the London School of Economics,

18:59

it essentially came out with the doctrine

19:01

that the quantity of money was one of

19:03

the least important things you could possibly think about,

19:05

that what was important was liquidity in a broad sense,

19:07

in which you included not only what we call money,

19:10

but also liabilities of savings institutions,

19:14

also Treasury Bills, also, everything you can think of.

19:18

You lump it in, that's liquidity, that's what's important,

19:21

and money itself is unimportant.

19:23

Well, subsequently to this,

19:25

there were some articles very critical of this,

19:27

in the British professional and other journals.

19:29

But it was this Radcliffe Committee report

19:33

that has more or less led to an almost complete neglect

19:36

of a quantity-of-money approach in Britain.

19:39

Then came the IMF report, plus,

19:42

the imports from the United States

19:45

of the backwater of the dispute that was going on here,

19:48

which started to spread toward Britain.

19:51

And in the last year or two, you now have raging

19:53

in the British press, in the British magazines,

19:56

exactly the same dispute that you have in this country.

19:59

A recent issue of The Banker magazine in Britain

20:02

had a series of three articles

20:04

on different faces of the monetary dispute.

20:06

The London Times, in its weekly business section,

20:09

has been carrying a whole series of articles.

20:13

Some of them, of course, I may say,

20:15

one of them was written by Harry Johnson

20:18

and an English collaborator.

20:20

Another one, on the other side, on the Keynesian side,

20:22

was written by an American, who was visiting over (laughs)

20:25

at one of the universities, he's been one of

20:27

the active participants on that side in this country.

20:31

So that, in this sense, you are having the same dispute.

20:34

As yet, the influence of the money supply school

20:37

has not reached as high a level in Britain

20:42

as it has in the United States.

20:50

In the United States, Mr. Martin,

20:51

in testifying before Congress, has now for the second year

20:54

described his objectives, in terms of the rate of increase,

20:57

desired rate of increase, in bank credit.

21:01

He said that the objective for 1969 was to have

21:05

bank credit rise at the rate of five to seven percent,

21:08

instead of at the 11% rate of the prior year.

21:12

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And by bank credit, he means?

21:14

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Well, by bank credit, as I pointed out, I think,

21:17

in one of these talks the other day,

21:19

what the Federal Reserve means by bank credit

21:21

is really bank deposits, and it's therefore very close

21:23

to the quantity of money, and it's a way in which

21:26

they can look at the quantity of money,

21:29

while pretending to still be looking at the credit market.

21:30

Well now it was a drastic change.

21:33

Up until about a year ago, if any Federal Reserve spokesman

21:35

talked before Congress, he stated what their objectives were

21:42

in terms of interest rates, or availability of credit.

21:44

He never would have issued

21:47

a numerical statement of this kind.

21:48

And the fact that he does, is an indication

21:50

that this is having an inroad on him.

21:53

Of course, the fact that it was 11% last year

21:55

shows that it didn't have enough of an impression on him--

21:58

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(laughter)

22:01

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Because the question, if I had been on that committee,

22:02

the question I would have pressed Mr. Martin with was,

22:06

well, if you now think--

22:08

Let me go back.

22:11

Mr. Martin stated explicitly,

22:12

that the credit expansion of 11% was too much,

22:13

that the Federal Reserve made a mistake in expanding it.

22:18

Now, I would have asked him, well why did you do it?

22:21

Because, or if I preceded that, if I said to him,

22:24

well, could you have made it less?

22:29

He would have had to say yes.

22:31

And then I would have said, well, why did you let it go 11%?

22:33

And the answer is the one I've been stressing here,

22:36

that while they had begun to pay some lip service,

22:38

and more than lip service,

22:42

to the notion of these quantitative targets,

22:43

they have not really embodied it in their working operations

22:45

in such a way that they really direct their attention

22:48

at controlling it.

22:51

But, you haven't gotten to this point as yet in Britain,

22:53

but I wouldn't be surprised if you did.

22:57

One of the interesting things about Britain is that

22:59

because it is a more homogeneous, centralized country,

23:01

with six banks, one central bank,

23:06

Britain can change its policy and its approach

23:10

more rapidly, in a sense, than we can.

23:13

Thus, if we go back, it moved much more rapidly,

23:16

and I'm now talking on a much broader field

23:19

than money alone, Britain moved much more rapidly

23:21

toward a welfare state and toward centralized control

23:24

than we have been able to do,

23:27

fortunately, from my point of view.

23:29

And I have always said, for a long time,

23:31

I would not be surprised if Britain

23:33

moved more rapidly back again.

23:34

Because of this character of Britain,

23:37

as a much tighter society,

23:39

with a relatively small number of people who are in control,

23:44

aristocratic structure, whether,

23:47

not necessarily an aristocracy of birth,

23:50

but an aristocracy of one kind or another,

23:52

with a small class that really runs the country,

23:55

a meritocracy is what they've been calling it more recently.

23:58

And similarly, in this monetary field,

24:01

I would not be surprised to see them move fairly rapidly

24:04

toward a much greater emphasis on the quantity of money.

24:07

-

That's interesting.

24:13

This discussion seems to be

rather European oriented this morning.

24:15

We used to worry about France causing us trouble,

24:18

by withdrawing our gold.

24:22

Are we apt to face a threat from France this time,

24:25

to devalue the franc, and cause us trouble that way?

24:29

-

Well, the threat, France is, of course, a troublemaker.

24:33

(laughter) Mr. de Gaulle makes a kind of a specialty

24:38

of being a troublemaker.

24:42

The situation, when France as accumulating gold,

24:46

when France was accumulating dollars, I should say,

24:51

and, at that time, as now, we had a formal commitment

24:55

to provide gold for dollars at 35 dollars an ounce,

24:59

to central banks, that was a real threat,

25:03

because it was true that France, at any time,

25:07

was technically in a position to come with

25:11

a billion dollars worth of dollars,

25:14

and say we want gold for this.

25:16

That threat is largely non-existent at the moment,

25:18

because France has been losing gold.

25:21

In fact, the U.S. gold stock has risen in the past,

25:24

since the two-tier system last, when was it,

25:28

February, I think it was, almost entirely because

25:31

France has had to acquire dollars to meet her obligations.

25:36

So that she has been contributing gold

25:40

rather than the opposite.

25:42

Now, as you say, the point comes up, well,

25:43

can't France cause this threat again, in a different way,

25:45

by threatening to devalue by 30%?

25:49

Well, that's a complicated issue.

25:52

If we go back to the source

25:54

of France's accumulation of dollars,

25:56

it was initially an over-devaluation.

25:59

In 1958, when Mr. de Gaulle came in,

26:02

the French franc was in a bad position,

26:05

but Mr. de Gaulle devalued sharply the franc,

26:07

much too sharply, so much so that he created

26:10

a surplus in his balance of payments,

26:14

and the surplus in his balance of payments

26:16

enabled him to accumulate dollars,

26:17

and it was later this accumulation of dollars

26:19

that enabled him to get gold.

26:21

But I do not believe the situation

26:24

is at all comparable right now to what it was then.

26:26

Because at that time,

26:29

while the franc was fundamentally weak,

26:31

the economy had great hidden reserves of strength in it.

26:35

And by monetary stabilization,

26:39

of the kind that Mr. de Gaulle achieved at that time,

26:42

the devaluation of the franc was only one

26:45

of a group of measures, which essentially removed

26:47

a lot of controls on the French economy,

26:50

which allowed it to free up.

26:52

As of the moment, it's not clear that he's in that position.

26:54

He's now been holding the franc peg,

26:57

and he's been holding it by a whole bunch

27:00

of internal controls, direct controls of a variety of kind,

27:02

keeping down imports, subsidizing exports.

27:06

He has made promises of wage increases

27:10

in connection with the May difficulties,

27:15

which will come home to plague him,

27:22

and which are causing a good deal of danger

27:25

of forcing him to expand the money supply,

27:28

underpin inflation, in order to make good on them.

27:32

Thus, if he were to devalue, it is very likely

27:36

that the major effect of that would be simply

27:40

to enable him to eliminate direct controls

27:45

which are holding the present rate.

27:48

You see, one of the problems in this area,

27:50

is that people think of devaluation

27:53

without contemplating what else it makes possible,

27:56

or goes along with it.

28:00

Let me see is I can be more precise on that.

28:01

Generally speaking, when you have a case of devaluation,

28:04

under modern conditions, where you've been trying to hold

28:08

a fixed rate, what happens has been,

28:10

that the country in question has been

28:13

restricting imports by direct controls,

28:16

by quotas, by things like that.

28:19

The effect of such a policy is to make

28:21

the internal price of the good

28:24

different from the external price.

28:26

If Mr. de Gaulle keeps American cars

28:28

from being imported in France, that means that the price

28:30

of the American car in francs inside France is higher

28:33

than the price at the dock, multiplied by

28:37

the official exchange rate.

28:39

Remove the import control and devalue,

28:42

and the effect of that may well be

28:44

to permit the price within France in francs to go down,

28:47

even though the price computed as

28:51

the dollar price at the dock multiplied by

28:53

the number of francs per dollar goes up.

28:56

That is, you eliminate this wedge.

28:57

And if this is what happens, it doesn't hurt us at all.

28:59

In fact, I would say, it helps us

29:03

by freeing up the markets a little.

29:05

-

Thank you, Dr. Friedman.

29:07

If you have questions, or comments, or suggestions,

29:08

for topics you would like discussed in this series,

29:11

please send them to Instructional Dynamics Incorporated,

29:14

166 East Superior Street, Chicago, 60611.

29:18

This is William Clark.

29:23

Dr. Friedman and I will be talking with you again next week.

29:24

Tape 17 - British Bank Rate, French Revolution

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