Tape 27 - Businessmen and Inflation, Bond Market, Harry Schultz Letter
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Transcript
Transcripts may contain inaccuracies.
- | 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 | |
- | 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 | |
- | From the businessman | 4:51 |
- | 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 | |
- | And that pressure can be exercised how? | 5:06 |
The old way of write your congressman? | 5:08 | |
- | 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 | |
- | 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 | |
- | 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 | |
- | This year sometime? | 8:37 |
- | 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 | |
- | 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 | |
- | 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 | |
- | 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 | |
- | Well that's uh, | 14:48 |
- | I wonder if you're familiar | |
with this? | 14:49 | |
- | 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 | |
- | 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 | |
- | Oh no | 16:41 |
- | 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 | |
- | 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) | ||
- | 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 | |
- | 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 | |
- | 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 | |
- | (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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