Tape 19 - Monetary Developments, Demand and Supply of Money and Credits, Inflation and Unemployment

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-	Hello, this is William Clark	0:02
	financial editor of the Chicago Tribune,	0:03
	welcoming you to another visit	0:06
	with the eminent economist Dr. Milton Friedman.	0:08
	Welcoming you, of course,	0:12
	on behalf of Instructional Dynamics.	0:13
	Dr. Friedman,	0:16
	we're approaching a little hiatus in these reports from you.	0:17
	I understand you're on a threshold of a trip.	0:21
	Yes, I'm leaving today for a trip abroad	0:24
	of about two and a half weeks or so.	0:27
	Where are you going to be?	0:30
	Well, we're going first to Israel for about 10 or 12 days,	0:31
	and then after that	0:37
	I'm going to a meeting in Switzerland	0:39
	of a group of economists and representatives	0:42
	of central banks to discuss,	0:45
	this is a purely academic group brought together	0:48
	not an official governmental meeting	0:50
	or anything like that.	0:52
-	I see
-	But it's an academic group organized as a matter of fact	0:53
	by some economists in this country,	0:56
	Professor Fritz Machlup of Princeton,	1:00
	William Fellner of Yale, and Bob Triffin of Yale.	1:02
	And we're gonna meet at Lugano with academic economists	1:06
	and central bankers to have a further discussion.	1:11
	This is one of a series.	1:14
	It's the first one I've been able to attend,	1:15
	but there have been several previous ones,	1:17
	discussing the various problems associated with	1:19
	international monetary arrangements.	1:22
	The problems of the balance of payments,	1:25
	and particularly of the various mechanisms	1:26
	of liquidity and adjustment.	1:30
-	We can look forward to some interesting reports on that	1:32
	when you get back.	1:35
-	Well that all depends.	1:36
	Unfortunately, this is an area in which there is a good deal	1:37
	of repetition in which you tend to go over the same ground	1:43
	over and over again	1:46
	because they're is only a limited number of positions.	1:46
	I may say I'm looking forward very much too to observing	1:48
	what's going on in Israel.	1:52
	I was over in Israel about seven years ago	1:53
	for about a month.	1:56
	And at that time,	1:57
	did a fairly detailed study of some of the economic aspects	1:59
	of the Israeli development.	2:04
	And what I was particularly studying on that,	2:05
	this was part of a world wide trip,	2:07
	in which I went to about five different countries	2:09
	to try to check out whether the relationships	2:13
	between quantity of money and economic magnitude	2:16
	like income, prices,	2:20
	employment were the same in other countries,	2:21
	and under other circumstances,	2:24
	as they were in the United States	2:25
	having done a detailed study for the United States.	2:26
	I thought that the best way to get additional information	2:29
	was to go to some very different countries.	2:31
	And so on that trip,	2:34
	I went to Yugoslavia, Greece,	2:35
	Israel, India, and Japan.	2:39
	And in each one of them,	2:42
	I got together good deal of data on their monetary changes,	2:43
	and their economic changes,	2:46
	and it was an absolutely fascinating investigation,	2:47
	unfortunately I have never been able to get enough time	2:51
	to follow through on the analysis and writing it up.	2:54
	But what came out in each of those countries,	2:57
	you found very much the same kind of relationships	2:59
	that I had found in the United States in earlier periods.	3:03
	So that in fact,	3:07
	that's part of the reason why I got increased confidence	3:10
	that what we were looking at were real phenomena,	3:13
	and not just a statistical artifact.	3:16
	But on this occasion,	3:19
	Israel, of course,	3:20
	is faced with some very very real problems	3:21
	arising out of the Seven Day War,	3:23
	which involved taking over a lot of territory,	3:27
	bringing under Israeli political control,	3:29
	a very large number of Arabs.	3:32
	So that is undesirable from the Israeli point of view	3:34
	to maintain permanently.	3:37
	But they've got a kind of a bear by the tail	3:39
	because the Arabs appear utterly unwilling	3:41
	to make a settlement,	3:44
	which would enable them to get rid of these areas.	3:45
	And I'm sure the economic problems associated with that	3:47
	will turn out to be very interesting as well.	3:50
-	I'm sure they will.	3:52
	And we'll look forward to hearing about your trip	3:53
	next time we visit about three weeks hence.	3:55
	Dr. Friedman,	3:58
	I want to relay a question from a listener.	3:59
	But first I wonder if you would bring us up to date on	4:02
	what has been happening	4:05
	within the money area of money supply?	4:06
	What are the indicators telling you?	4:09
-	Well you know,	4:11
	ordinarily one week or two weeks or three weeks is not much	4:12
	evidence, but you will recall that a couple of weeks ago,	4:15
	I pointed out that it was very uncertain,	4:19
	which way we were going to go,	4:21
	and that there were some signs,	4:22
-	Yes.	4:24
-	That the extreme slow down
	in the growth of monetary magnitudes	4:27
	that occurred in December, January might be reversed.	4:30
	Now as of this date,	4:36
	as I talk,	4:38
	there are only two weeks of evidence.	4:40
	Last week I commented on one,	4:43
	this time I have another.	4:45
	Two weeks is twice as much evidence as one,	4:46
	but still not very much.	4:49
	And by the time the subscribers hear this,	4:51
	they will be able to have access to a third week,	4:53
	which will give them 50% more information yet.	4:55
	So far as those two weeks alone are concerned,	4:58
	they are really very interesting	5:01
	because the first week showed a very pronounced increase	5:02
	in the monetary magnitude as I had expected you would have.	5:06
	The second week showed a slight backing off,	5:11
	but still taking the two weeks together	5:15
	they showed a decided reversal from real restriction	5:17
	to considerable ease to a resumption of ease.	5:23
	Now the $64 question.	5:26
	Will the next few weeks continue that	5:30
	or will they show up still further backing off	5:33
	and a tightening down?	5:36
	There is no doubt that the Fed is talking	5:37
	as if they were going to continue a very tight policy,	5:40
	but as we've seen so many times in the past,	5:44
	their talk is not always a reliable index to their action,	5:46
	so it seems to me that one ought still to maintain	5:50
	an open mind about the developments,	5:53
	and that there is a very real possibility	5:57
	that you will see a continuation	5:59
	of this relaxation of the past two weeks	6:02
-	I see.	6:05
	While you're away Dr. Friedman,	6:06
	where should your subscribers look to	6:07
	so that they can follow this in your absence	6:10
-	Well, not only while I'm away,	6:12
	but all the time it seems to me	6:13
	that they will find extremely useful,	6:15
	the weekly reports that are put out by	6:18
	the Federal Reserve Bank of St. Louis,	6:20
	which has been doing an extraordinarily effective job	6:22
	in bringing together important and useful statistical series	6:25
	and presenting them in a way	6:29
	which is immediately intelligible.	6:31
	They have a weekly report on US financial data	6:33
	that comes out once a week.	6:38
	They have a monetary report on monetary trends	6:40
	and also on national trends.	6:43
	Now as a taxpayer,	6:45
	I should not be encouraging the subscribers	6:47
	to ask and write for these reports	6:49
	because we're all going to pay for it as taxes.	6:51
	It may not look that way,	6:56
	but the arrangements with the federal reserve system is a	6:57
	wholly bookkeeping fiction,	7:02
	whereby the treasury pays them over interest	7:03
	on the government bonds they hold.	7:07
	The fed spends whatever it wants to spend.	7:10
	Any balance essentially, with minor exceptions,	7:13
	are turned back to the treasury.	7:15
	So in effect,	7:17
	indirectly, you have these expenditures	7:18
	by the 12 Federal Reserve banks	7:21
	in the federal reserve system	7:22
	do in fact come out of tax money,	7:24
	but at any rate,	7:27
	it's also true that the Federal Reserve Bank of St. Louis,	7:30
	like the other federal reserve banks make their material	7:33
	available on request without charge and anybody	7:36
	who wants to write to the research division	7:39
	of the Federal Reserve Bank of St. Louis,	7:43
	and ask to be put on their mailing list	7:44
	for their weekly report on US financial data,	7:46
	and their monthly reports on monetary and economic data	7:49
	will certainly be put on that list,	7:53
	and that would certainly be the place to look.	7:54
	And what I would look for is they give in each issue	7:56
	a chart of the US money stock,	8:00
	and recently in the past few weeks,	8:03
	they've been adding to that a series	8:05
	on the money stock plus government treasury deposits	8:08
	because of the wide swings in treasury deposits,	8:11
	which have played such an important role in recent period.	8:13
	And if you look on that,	8:17
	that's a very quick bird's-eye view	8:20
	to see was happening to the money stock narrowly defined.	8:22
	Generally speaking,	8:25
	they also give a series on money stock plus time deposits,	8:26
	which gives a broader prospectus.	8:30
	As I've emphasized before,	8:32
	the main difference	8:34
	between these two arises out of the silly regulation Q.	8:35
	You know it's extraordinary how hard it is	8:39
	for people to learn anything from experience.	8:41
	I'm no longer sure of the exact date,	8:48
	but it was before 1800.	8:49
	It was something like 1780 or 90, something like that,	8:51
	that Jeremy Bentham wrote his famous pamphlet	8:54
	in defense of usury in which essentially	8:58
	it was an attack on usury laws,	9:01
	on laws setting maximum rates on interest.	9:03
	I do not think there has been a reputable economist	9:08
	from that day to this	9:10
	who has had a good thing to say about usury laws.	9:12
	And yet in every state of the United States,	9:15
	we have usury laws on the federal level.	9:17
	We have regulation Q.	9:19
	We have a law prohibiting the payment of	9:21
	interest on demand deposits.	9:23
	We have the law providing	9:24
	that the Treasury may not charge an interest rate	9:26
	of more than 4.25%.	9:28
	So sometimes it seems almost hopeless to believe	9:30
	that reason alone is going to have any impact at all.	9:34
-	Frustrating.	9:38
	Dr. Friedman, we have an inquiry from,	9:40
	we have several,	9:43
	but I shall read one from a subscriber	9:44
	who asks how would you answer this comment,	9:49
	and then the comment apparently is a quotation from	9:51
	a newsletter put out by the firm of	9:54
	Salomon Brothers & Hutzler.	9:59
	And this is the comment.	10:00
	Supply is just one side of an equation	10:02
	of which the other side is demand.	10:05
	It would seem that if the Fed were to provide	10:07
	X dollars of new money	10:11
	when the demand for bank credit was twice that amount,	10:13
	this would be a very restrictive policy,	10:16
	but the same amount of new money at a time	10:19
	when demand was only one half that amount,	10:22
	would constitute an expansionary policy.	10:25
	And that's the comment.	10:28
-	The central idea in this comment is certainly right.	10:31
	However, the comment,	10:35
	in my opinion, is not in its details correct.	10:38
	Now, let me see if I can make that clear.	10:44
	It's certainly true that if you're going to look at	10:46
	any problem of whether anything is tight or easy,	10:48
	anything is in short supply or long supply,	10:50
	you do have to look in both supply and demand.	10:53
	If you observe that the price of shoes goes up,	10:56
	you can't say whether that's because	10:59
	there's a shortage of supply,	11:02
	which drives the price of shoes up,	11:03
	or because there's an expansion in demand,	11:05
	which drives the price of shoe's up.	11:07
	And similarly,	11:10
	if you ask what is an appropriate expansion	11:10
	of the quantity of money, it is true.	11:13
	Then one must ask that in terms of	11:15
	what is happening to the demand.	11:17
	So in this general sense,	11:19
	which I'll come back to again in a moment,	11:21
	I agree with the tone of that comment.	11:23
	But in the detail, I don't.	11:25
	And the reason I don't in detail is because	11:26
	the question is demand and supply of what,	11:29
	and this comment is written entirely in terms	11:32
	of the demand and supply of credit rather than of money.	11:34
	The sentence says if the Fed were to provide	11:40
	X dollars of new money,	11:42
	when the demand for bank credit was two X dollars.	11:45
	Well now what the Fed provides	11:47
	when it prints X dollars of new money is in the first place,	11:50
	it provides high powered money,	11:53
	which can serve as reserves for member banks,	11:56
	which can result in a multiple of X dollars	12:00
	of money to hold.	12:03
	But in the second place that's money not credit.	12:04
	It is true that this will enable the banks to extend credit,	12:09
	but if the demand for credit goes up for by two X dollars,	12:16
	this is not gonna be a demand for bank credit in particular.	12:20
	There isn't any such thing.	12:23
	There's a demand for credit,	12:24
	which may be satisfied by bank loans,	12:25
	may be settled by the sale of commercial paper,	12:27
	may be settled by private loans between individuals,	12:29
	may be settled by issuing a bonds or stocks and so on.	12:32
	And the crucial point	12:36
	that is neglected in this kind of a statement is that,	12:37
	so far as the credit market is concerned,	12:41
	bank credit is a very minor part of the total.	12:43
	It's the tail to a dog, not the dog.	12:45
	The greater part of credit is total credit available	12:48
	and extended,	12:52
	I don't know that there are any good figures,	12:53
	but it's clearly a very large multiple of bank credit	12:55
	if you take into account just for example trade credit	12:58
	extended by one enterprise by a seller of goods	13:01
	to the retail dealer or to the wholesaler	13:06
	whose buying the parts.	13:09
	If you take into account commercial paper	13:10
	on the open market in New York.	13:12
	If you take into account the bond market,	13:14
	the stock market, the treasury bill market and so on.	13:16
	The total volume of credit is an enormous multiple	13:19
	of the amount of bank credit,	13:23
	and that in turn is a multiple	13:28
	of what the Federal Reserve provides,	13:30
	and hence if the Federal Reserve tries	13:32
	to meet demands for credit,	13:35
	tries to look at the question	13:37
	in terms of whether it's going to match	13:38
	the demand for credit.	13:40
	It's like trying to pinch one small end of a balloon	13:43
	and reduce it in size.	13:48
	On the other hand,	13:50
	if you now look at it in terms of the supply of money,	13:51
	you're talking a different language in the first place,	13:54
	of the total amount of money by whatever definition,	13:57
	and there are various definitions,	14:00
	that is either entirely provided by the Fed	14:02
	or the government if you're talking about currency,	14:07
	Federal Reserve notes,	14:11
	silver certificates,	14:13
	which are now largely out of circulation,	14:14
	greenbacks which are still in circulation.	14:16
	That is a currency	14:18
	we carry in our pocket is entirely provided	14:19
	by the government,	14:21
	and all of the rest of what we call money is bank money	14:22
	that is deposits.	14:25
	That is not provided directly by the government.	14:27
	Part of it is in the form of the reserves,	14:30
	the rest is the money which is created,	14:32
	the deposits which are created by commercial banks.	14:34
	But if you consider the total quantity of money,	14:37
	that is something which the Federal Reserve does control,	14:40
	and can control on which it exerts a great leverage.	14:42
	Now looking in those terms,	14:45
	let's go back to this comment.	14:49
	It is possible that you might have an increase	14:52
	in the demand for money not for credit,	14:56
	but demand for money.	14:58
	For example, if you have a period when, for whatever reason,	14:59
	people suddenly get very uncertain about the future.	15:04
	This is what has happened in many countries	15:07
	when you've had an outbreak a war.	15:09
	Let's say war breaks out.	15:11
	All of a sudden, people don't know what's going to go on.	15:12
	Everybody tries therefore to get larger cash balances,	15:14
	literally money currency mostly in that case,	15:18
	so it may be deposits as well,	15:21
	just because he's uncertain about what the future is going	15:23
	to bring and he wants to be a little bit more protected	15:25
	to move either way.	15:27
	Under those circumstances	15:29
	that is an independent increase in the demand for money,	15:30
	which if the supply of money is not increased	15:33
	will tend to raise the price of money.	15:36
	But when I say raise the price of money,	15:43
	I don't mean the interest rate.	15:44
	That's not the price of money.	15:46
	That's the price of credit.	15:47
	The price of money is how much goods and services you have	15:49
	to give up to get a dollar.	15:51
	So if there is an independent increase	15:53
	in the demand for money,	15:55
	under those circumstances,	15:56
	with no change in the quantity of money supplied	15:57
	that will tend to lower commodity prices.	16:00
	That is it will tend to raise	16:05
	the amount of goods and services you have	16:07
	to give up to get a dollar.	16:08
	The price of money is the upside down of the price level.	16:10
	If prices of goods and services in general go up	16:14
	in terms of money,	16:17
	that means that a dollar won't buy this.	16:19
	That means that the price of a dollar is less.	16:22
	If the prices are goods and services go down	16:25
	that means the dollar will buy more.	16:27
	That means that the price of a dollar	16:29
	is more goods and services.	16:33
	So it is certainly true	16:35
	that in a full analysis of the monetary situation,	16:37
	you must allow in principle for both demand and supply.	16:42
	And therefore,	16:46
	if you were going into a full analysis,	16:48
	you would say that	16:51
	the monetary authorities of Federal Reserve	16:52
	in deciding whether to increase or decrease	16:53
	the supply shouldn't take account	16:55
	of what is happening to the demand.	16:57
	Now, once you said that you will say to me,	17:00
	but then how come you go around talking about	17:02
	the Federal Reserve simply increasing the quantity of money	17:05
	by a steady rate year after year.	17:08
	Why not say that they should increase it,	17:09
	sometimes faster sometimes slower, to adjust to demand.	17:11
	Well the difficulty the point there is,	17:16
	I would have no objection to doing that	17:18
	if you had a very good way of knowing	17:20
	what was happening to demand.	17:22
	But the fact is you do not.	17:24
	And the fact is that as we study the past,	17:25
	the striking thing about experience,	17:29
	and now I speak not only of this country,	17:32
	but of other countries that we've looked into,	17:34
	is that the demand for money tends to be highly stable.	17:36
	Now I have to expand on that a little bit.	17:42
	When I say the demand for money tends to be stable,	17:44
	I don't mean the number of dollars demanded.	17:47
	I mean the demand for money expressed as a relationship	17:50
	between the quantity of money demanded and other things.	17:56
	Let me illustrate.	18:00
	If you say demand for shoes is stable,	18:00
	you don't mean that the number of pairs of shoes	18:03
	people buy is the same.	18:05
	What you mean is that the relationship between	18:08
	the number of pairs of shoes	18:09
	and the price of shoes is the same.	18:11
	This is of course a very important point	18:13
	in elementary economics,	18:16
	but the source of major confusion in the newspapers.	18:17
	I often start of course in the theory of price	18:23
	by writing up on the board, the following two statements.	18:27
	First a statement,	18:30
	demand went up and therefore price went up.	18:32
	And second statement,	18:36
	price went up and therefore demand went down.	18:37
-	I see.	18:40
-	Now those statements sound contradictory.	18:41
	If the first statement of demand went up and price went up.	18:44
	The contradiction is easily resolved.	18:47
	And this is why I put it up in the discussion	18:49
	when we're starting on what's the meaning of demand.	18:51
	It is, the economist will say, well let's reword that.	18:54
	The demand function went up,	18:58
	the whole schedule of demand,	19:00
	the quantity people wanted to buy	19:02
	at each separate price went up,	19:03
	we would say in technically economics,	19:05
	there was a shift in the demand curve.	19:06
	So the demand went up in that sense	19:09
	and that of course raised prices.	19:11
-	I see.	19:13
-	On the other hand,	19:13
	we would take the second sentence,	19:14
	the price went up,	19:16
	and therefore the quantity demanded went down.	19:17
	Not demand in the sense of conditions of demand	19:21
	in the sense of the function,	19:23
	but the quantity demanded, in the sense,	19:25
	of a moment along the curve.	19:26
	Well, in the same way,	19:29
	when I say the demand for money is highly stable,	19:30
	I mean that it's relationship	19:34
	to the things on which it really depends,	19:36
	which are for example, the total income total output.	19:38
	If the quantity of goods and services produced	19:42
	goes up well then the amount of dollars	19:44
	people want to hold at a given price level tends to go up.	19:46
	If the interest rate goes up,	19:49
	well then this makes it more expensive to hold cash,	19:51
	the quantity of money people demand,	19:54
	in that sense, will go down.	19:56
	I could go on.	19:58
	There are many other factors to enter into.	19:59
	But the important point I want to stress	20:01
	is that historically,	20:03
	the demand function for money has been highly stable,	20:06
	and it turns out historically	20:10
	that almost all of the movements in prices	20:12
	have in fact been a result,	20:15
	not of changes in the demand for money,	20:17
	but of changes in the quantity of money supply.	20:20
	And it's because empirically demand has been highly stable,	20:23
	whilst supply has been highly fluctuating	20:26
	that I say that as a practical man,	20:29
	the Central Bank could do perfectly well	20:32
	by forgetting about the demand side,	20:35
	and looking only at its supply side.	20:37
	The chief exception one might make to that,	20:40
	if one wanted to,	20:43
	the chief exception one might make to that,	20:46
	and illustrates my point perhaps is for seasonal moments.	20:49
	Clearly over the course of the year,	20:54
	there tend to be shifts in the demand function for money	20:56
	as you shift from the summer season,	20:59
	vacation season to Christmas.	21:01
	And in principle,	21:03
	there would be nothing wrong in doing,	21:04
	as the Fed now does,	21:05
	of allowing the supply of money to adjust	21:07
	during the course of the year to the demand for money.	21:09
	However, the difficulty with that is that it's very hard	21:14
	often to distinguish between a seasonal change	21:17
	and something else.	21:21
	And in consequence,	21:23
	I believe that it would be less costly to dispense	21:24
	even with the seasonal adjustment,	21:30
	and simply let the supply of money to go up at a steady rate	21:32
	in order to avoid the mistakes	21:35
	that happened when you confuse the two.	21:36
	But in this sense,	21:38
	and I think there's a great deal of point to this comment.	21:38
-	I see.	21:42
	That's very interesting.	21:43
	Dr. Friedman, I wonder if I might invite you	21:44
	to comment on a couple of statements made recently	21:46
	by members of the council of economic advisors,	21:50
	in testimony before the joint economic committee,	21:53
	statements relating to the problem	21:56
	of employment or unemployment.	21:58
	The first one was this.	22:01
	At the same time,	22:03
	no one can assure that the distortions	22:04
	from three years of economic overheating and price inflation	22:06
	can be corrected with no effect on unemployment.	22:10
	And then a little bit later on,	22:14
	they said our present main concern is with slowing down	22:17
	the rate of growth of aggregate demand in a way	22:21
	that will not cause	22:25
	an unacceptable increase in unemployment.	22:26
	What would be your reaction to those comments?	22:30
-	Well, I think the position of the council is obviously,	22:33
	in these respects, a very good one,	22:38
	but I am not sure that they make the case	22:40
	for what they're trying to say as strongly	22:44
	as it can be made.	22:46
	There is wide criticism	22:48
	that is going around	22:49
	that the most extreme form of it,	22:50
	a kind which for example,	22:53
	has been expressed by many of the AF of L,	22:54
	in which he says,	22:59
	oh it's intolerable that you should increase unemployment	23:00
	in order to slow down inflation.	23:03
	Well, that's an absurd kind of a statement.	23:06
	It's like saying it's intolerable	23:09
	that you and I should not be able to live to 150 years.	23:10
	The whole point is not that anybody proposes	23:16
	to increase unemployment on order to slow down inflation.	23:19
	The point is very different.	23:23
	It is that any means of slowing down inflation is likely to	23:25
	have as an undesired,	23:31
	but inevitable byproduct, an increase in unemployment.	23:34
	But the case is even stronger.	23:39
	In my opinion,	23:41
	staying at the present rate of inflation,	23:43
	not slowing it down,	23:46
	but just staying where you are,	23:47
	will also involve an increase in unemployment,	23:48
	and therefore I would argue	23:51
	that if it is insisted that you must keep unemployment	23:54
	where it is,	23:58
	there is no way you can do that indefinitely,	23:59
	and only one way you can do it for a few years.	24:02
	You could do it for a few years by speeding up	24:06
	the pace of inflation by going from 5% to 7% to 8% to 10%,	24:08
	but if you were to keep the present rate of inflation at 5%,	24:14
	if you were to keep it there,	24:17
	in my opinion, unemployment would creep up.	24:20
	Now why?	24:22
-	Why is that?
-	Well, it's because of the difference	24:24
	between the actual rate of inflation,	24:27
	and what people anticipate.	24:30
	Why is it that if you move, as you did,	24:33
	let's say you had very little inflation in the United States	24:36
	from 19 say 58 to 1964 '65.	24:41
	During that period,	24:47
	you had an unemployment rate at the end of it,	24:48
	which was roughly of the order of 4%.	24:50
	Now, inflation's speeded up.	24:54
	And unemployment dropped below 4% down into threes,	24:58
	and now down to as low as 3.3%, why?	25:02
	Well because as prices speeded up,	25:05
	the same dollar wage to the employer	25:10
	became a smaller real wage.	25:13
	The employer looks at wages in terms of	25:16
	how many units of his product, as it were,	25:18
	he has to pay the hire an hour of labor.	25:20
	And if he can sell his product for a higher price,	25:23
	the wage looked lower.	25:25
	The employee on the other hand looks at his wage	25:27
	in terms of what he thinks it will buy him.	25:30
	He came into this period with an expectation	25:33
	that prices would be relatively stable.	25:36
	Therefore you had what looks like a strange phenomena	25:38
	when the employer offered a slightly higher money wage rate,	25:45
	nominal wage rate,	25:49
	to the employee, this looks as if his wages were going up.	25:51
	To the employer,	25:55
	it looks as if the wage he was paying was going down.	25:56
	Now that's a neat trick,	25:59
	if you can produce it, to raise the wages,	26:00
	as it looks to the employee,	26:02
	and to lower it as it looks to the employer.	26:04
	But that is what happened	26:06
	because what matters to the employee is what he thinks	26:08
	his wage will buy.	26:11
	And so long as he thought prices were going to be stable.	26:12
	He thought he was getting a higher wage rate.	26:15
	As things actually developed he did.	26:20
	And as he came to recognize this,	26:24
	employees all over started to demand higher wage rates,	26:25
	but then as they did that,	26:31
	inflation speeded up still faster.	26:33
	And so you had a situation in which they were going forward	26:35
	one step and back two steps.	26:39
	In other words,	26:41
	unemployment has been abnormally low	26:42
	because people have been getting fooled about	26:44
	what was happening.	26:47
	Now if you were to have a continuous rate of inflation	26:48
	at exactly 5%, people would catch up with this.	26:55
	You'd stop fooling them.	26:58
	As you stop fooling them,	26:59
	you would find that unemployment would inevitably creep up	27:01
	because you would get rid of that sort of fake employment,	27:04
	which resulted only	27:08
	because people were being fooled about	27:09
	what the prospects were.	27:11
-	Thank you very much, Dr. Friedman.	27:13
	If you have questions or comments or suggestions	27:15
	for topics you would like to discuss in this series,	27:17
	please send them to	27:20
	Instructional Dynamics Incorporated,	27:21
	166 East Superior Street, Chicago 60611.	27:24
	This is William Clark.	27:29
	Dr. Friedman and I will be talking to you again	27:30
	in about three weeks.	27:33
	Have a good trip doctor.	27:34

Item Info

Title:

Tape 19 - Monetary Developments, Demand and Supply of Money and Credits, Inflation and Unemployment

Date:

1969

Contributor:

Friedman, Milton, 1912-2006

Subject:

Format:

audiocassettes

Language:

English

Digital Collection:

Paul A. Samuelson papers, 1933-2010 and undated

Source Collection:

Paul A. Samuelson papers, 1933-2010

Series:

Economics Cassette Series: Milton Friedman

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ref2562_4z8
samuelsonpaul
duke:325234
pstau001211
ark:/87924/r4rj49b3k
e9d9bb6a-baca-474f-851b-e3986ec68fbc

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Tape 19 - Monetary Developments, Demand and Supply of Money and Credits, Inflation and Unemployment

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