Tape 124 - The German Mark, Federal Reserve Action, Interest Rates, Subscribers Queries

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Rose	Hello, this is Rose Friedman,	0:02
	inviting you on behalf of Instructional Dynamics	0:04
	to another of our bi-weekly interviews with Milton Friedman,	0:07
	Professor of Economics at The University of Chicago.	0:10
	We are taping this interview on Wednesday, July 4th, 1973.	0:13
	There has been a flurry	0:19
	in the German money market this past week.	0:20
	Is this the beginning of another series of monetary crisis?	0:23
Milton	I believe not.	0:27
	I believe rather that this is the first sign of the breaking	0:28
	up of the so called European snake on the river.	0:32
	That is to say the agreement among six European countries	0:37
	to maintain their own exchange rates	0:42
	in a fixed relationship to one another.	0:45
	The German government has revalued the mark,	0:48
	but that is meaningless with respect to all	0:52
	of the currencies with respect to	0:54
	which the German mark was floating.	0:56
	It's effective meaning is with respect to the franc	0:58
	to the Benelux currencies and to the other currencies	1:01
	with respect to which the German mark	1:04
	had a fixed exchange rate.	1:07
	As the listeners to these tapes know,	1:09
	from the very beginning I have argued	1:11
	that that agreement to fix the exchange rates	1:13
	among the six was not like the last one.	1:16
	This already it is now having to be restructured.	1:19
	What happened was that at the fixed rates	1:22
	among those currencies there was	1:25
	a preference for the German mark.	1:28
	In order to maintain those fixed rates,	1:30
	Germany was having to accumulate	1:32
	French francs, Belgian francs and so on.	1:33
	Germany finally reacted to that the same way	1:37
	it had reacted much earlier to the situation	1:40
	when it was forced to accumulate American dollars.	1:43
	It finally gave up, stopped purchasing those currencies,	1:46
	revalued the mark by 5%	1:50
	with respect to those other currencies.	1:52
	So I would rather say that what's happened in Germany	1:55
	is simply another illustration on a somewhat smaller scale	1:57
	of the defects of fixed exchange rates.	2:01
	I do not know what the outcome will be.	2:04
	Temporarily, at least, the group of European countries	2:06
	have patched up the agreement.	2:11
	They are going to continue to try	2:13
	to maintain a system of fixed exchange rates	2:15
	but a new set of fixed exchange rates	2:17
	with the German mark valued more highly.	2:19
	It will run into trouble again.	2:21
	Whether it will be in two months or six months,	2:23
	it's hard to say, but I expect that, sooner or later,	2:25
	we will have another flurry of this kind	2:28
	which will lead either to more reevaluations	2:31
	within that group of countries	2:33
	or else to the establishment of floating rates	2:36
	among them as well as between them,	2:40
	the U.S. dollar, the British pound,	2:43
	and other major, other currencies.	2:46
Rose	Has this had any effect on the dollar?	2:48
Milton	Well obviously one effect is that the price	2:51
	of the dollar vis-a-vis the German mark had a change	2:53
	by comparison with the price	2:56
	of the dollar vis-a-vis the other currencies.	2:57
	The cross-rates between the currencies have to stay orderly.	3:00
	However and it is true that coincidentally	3:04
	with the disturbance in the European markets,	3:07
	the dollar did fall relative to the German mark,	3:12
	as it had to, but also relative to the other currencies.	3:15
	But I don't believe that that fall really had very much	3:18
	to do with the flow into the German mark	3:22
	because the movement into the German mark came out	3:29
	of these other European currencies not out of the dollar's.	3:32
	The reason why the U.S. dollar fell at the same time	3:35
	I think is very easy to understand.	3:38
	It was largely a reaction to the export restrictions	3:41
	which Mr. Nixon imposed.	3:44
	Mr. Nixon imposed restrictions on soybeans.	3:46
	He imposed restrictions on other commodities,	3:49
	and moreover, his action was a clear sign	3:52
	of further restrictions to come.	3:55
	Well now if you ask yourself	3:57
	what a foreigner wants dollars for,	3:59
	he wants dollars in order to buy American goods.	4:00
	Every time we reduce the range of American goods	4:03
	which he can buy with those dollars,	4:06
	the value of those dollars to him goes down,	4:08
	and thus, it is perfectly understandable	4:10
	to be expected that export embargoes would produce	4:13
	a decline in the value of the U.S. dollar	4:17
	in terms of other currencies.	4:19
Rose	Still on money matters, the Federal Reserve	4:21
	has just increased the discount rate	4:25
	and increased reserves as well.	4:28
	What does this imply about the Federal Reserve policy	4:30
	for the near future?	4:33
Milton	Well the first thing to point out is	4:34
	that the discount rate was very far below the market rates.	4:37
	Short-term market rates had risen, well the most recent rise	4:43
	has been the prime rate rise to 8%.	4:49
	Treasury bill rates are a little bit less than that	4:52
	but not far from that.	4:55
	The federal funds rate, that is the rate	4:57
	at which member banks borrow from one another,	4:59
	had also gone up very sharply.	5:02
	As a result, the Federal Reserve discount rate was	5:05
	out of line with market rates	5:08
	which of course established a strong incentive	5:10
	for member banks to borrow as extensively as they could	5:13
	at Federal Reserve Banks, and indeed borrowings	5:16
	from Federal Reserve Banks have been	5:18
	at an all-time high in recent weeks.	5:20
	In consequence, the simplest interpretation	5:24
	of the discount rate increase was that it was a reaction	5:28
	to the Fed to what was happening in the market,	5:30
	not an indication of some independent move	5:32
	by the Fed to change what it was doing.	5:35
	The interesting thing about this discount rate is	5:39
	that it does bring the discount rates	5:42
	to the highest level in Federal Reserve history.	5:44
	Now in a way, that's not surprising.	5:47
	Inflation is also at the highest level in Federal Reserve	5:49
	history except only for the wartime episodes,	5:52
	for the episode immediately after World War I	5:55
	and for inflation during World War II and for inflation	5:58
	during a brief period around the Korean War episode.	6:02
	If we look at what has been happening,	6:07
	more importantly, on the side of monetary growth,	6:10
	the situation is that for the first few months of 1973,	6:14
	the quantity of money was growing slowly,	6:19
	but in the last two months, it has been going	6:20
	at an incredibly high rate, something like 11.3%	6:23
	for a two month period.	6:26
	The latest figures do not show any slowdown	6:28
	in that rate of growth.	6:30
	They show a continued rate of growth.	6:31
	I think the last figure is for the past two months	6:33
	something like 12% for narrow money, money narrowly defined.	6:35
	It is perfectly clear that these rates exceed substantially	6:40
	the rates that the Fed is aiming at.	6:44
	It is also clear that the Fed recognizes that it cannot,	6:47
	for any long period, have its cake and eat it too.	6:51
	It cannot have a monetary growth rate it wants	6:54
	at the same time that it has interest rates	6:57
	where it wants them, and so I believe that, unquestionably,	6:59
	the Federal Reserve has reconciled a higher interest rate	7:03
	and is trying to bring down the rate of monetary growth.	7:07
	However, to say that they are trying to bring it down	7:11
	does not mean that they will succeed	7:14
	or does not mean how far they will succeed.	7:15
	Again, as I repeatedly emphasized, I think the best basis	7:18
	for us to judge is what their behavior	7:22
	has been over the past several years,	7:24
	and over the past several years,	7:26
	what is important is that whenever monetary growth	7:28
	has exceeded by substantial amounts	7:30
	the levels they were aiming at, they have brought it back.	7:33
	They have brought it back temporarily	7:37
	to the level they were aiming at and then let it go again.	7:39
	As a result of which, over any long period,	7:41
	the rate of growth has averaged higher	7:43
	than that which they were aiming at.	7:45
	I believe right now they are aiming at something like 5%.	7:47
	They are getting something over a five	7:50
	or six month period of 7% or more.	7:54
	I am reasonably confident that over the near future,	7:57
	they will be bringing it back down to a lower level,	8:01
	but I doubt very much that they will be getting it down	8:03
	to something like 5% over the coming few months.	8:06
	With respect to the change in reserve requirements,	8:09
	it's worth emphasizing what role that plays.	8:12
	What the Fed did was to increase the percentage of deposits	8:15
	at the Federal Reserve in cash, of all in cash,	8:21
	which member banks must hold	8:24
	corresponding to their demand deposits.	8:26
	It increased, I believe it was,	8:28
	by one half of a percentage point that reserve requirement.	8:30
	Now it's worth emphasizing that there is absolutely nothing	8:35
	that can be done by changing reserve requirements	8:38
	that cannot be done by open market operations.	8:40
	Open market operations are	8:43
	a more sensitive and effective tool.	8:44
	Changes in reserve requirements are a blood instrument	8:47
	which are discontinuous in time and, on the whole,	8:51
	are a poor instrument for monetary (mumbles).	8:54
	Why then did the Fed change reserve requirements?	8:56
	I think the answer is very clear.	8:59
	The Fed has been very greatly concerned about the argument	9:01
	that high interest rates mean large bank profits,	9:05
	and in fact, the profits of banks have been very good.	9:08
	I think there is, my own belief is that the Fed is anxious	9:11
	to take measures which will keep bank profits	9:15
	from going up too rapidly.	9:18
	The one effect of a reserve requirement increase	9:19
	which is different from an open market sale	9:22
	of bonds of exactly the same amount,	9:28
	the one effect that is different is	9:31
	that the reserve requirement increase,	9:32
	in effect, reduces the profits of banks	9:35
	by requiring banks to keep a larger amount	9:37
	of their assets in a non-interest bearing form,	9:40
	namely in the form of reserve.	9:42
	And I believe that that is the explanation	9:44
	for the reserve requirement increase,	9:46
	a purely political explanation, not in any way	9:47
	an economic or a monetary policy explanation.	9:51
Rose	What has the outlook been	9:55
	for the interest rate structure?	9:57
Milton	Well the interest rate structure has been,	9:59
	as you all know, what economists have come to call	10:02
	an inverted term structure that as short-term rates,	10:07
	if of anything have tended to be higher	10:11
	than long-term rates, whereas the normal term structure	10:12
	is short-term rates rising relative to,	10:15
	short-term rates being lower than long-term rates.	10:19
	It's not clear what is going to happen about this.	10:23
	If indeed, as seems to be the case, something of a slowdown	10:26
	in the physical economy is in process.	10:31
	If we are reaching or passing a peak rate	10:34
	of physical growth, typically, short-term interest rates	10:40
	have reached their peak about the same time	10:46
	that economic growth short-term cyclical growth	10:49
	has reached its peak.	10:51
	Very often you have the phenomenon that is now occurring,	10:54
	what seems like an extremely rapid rise in short-term rates	10:57
	just before they reach their peak and turn around.	11:01
	That's been the case now in the past month or so.	11:04
	You've had a very sharp run up in short-term rate.	11:06
	I would therefore not be surprised to see short-term rates	11:09
	peak out sometime in the next month or two.	11:13
	Of course partly this will depend	11:17
	on the character of the economic move.	11:18
	If all we have is a mild slowing down on the rate	11:21
	of economic growth, what I say may not occur.	11:24
	On the other hand, if we have a mini-recession a la '67	11:27
	or a full-blown recession a la 1970,	11:35
	albeit an inflationary recession,	11:39
	if we have anything of that kind,	11:42
	why then I think the likelihood is that short-term rates	11:44
	will come down from their present levels.	11:47
	Long-term rates are quite a different matter.	11:50
	We observed in 1969 and 1970 that,	11:52
	although short-term rates peaked with the cycle,	11:56
	long-term rates continued rising for something	12:00
	like oh six months, nine months after the peak in the cycle.	12:02
	This is a pattern which we observed	12:07
	frequently before World War I.	12:09
	In fact, it was a typical pattern for long-term rates.	12:11
	I would not be at all surprised	12:15
	if that pattern would be repeated again this time.	12:17
	After all, long-term rates are,	12:20
	from a fundamental point of view, low.	12:22
	The rate on high-quality corporate securities	12:25
	is somewhere around 7.75%.	12:29
	There is hardly anybody who expects	12:33
	that the rate of inflation over the next four	12:35
	or five years will be less than 4%.	12:36
	That means that the real rate of interest	12:42
	in long-term securities is about 3.75% at the very highest.	12:43
	I think a much more reasonable expectation of the rate	12:49
	of inflation is it'll be something	12:52
	like 5% or 6% in which case you have a long-term rates	12:53
	in a real terms of 1%, 2%.	12:57
	Over the past 200 years, real rates calculated	13:00
	in this way have tended to run around 3% to 4%.	13:03
	So long-term rates far from being abnormally high are,	13:06
	if anything, relatively low in light	13:09
	of the inflation that can be expected.	13:11
	In addition, as I say, we have the situation	13:14
	in which many corporate enterprises	13:17
	have undertaken capital expenditure programs	13:19
	which cannot be stopped on a dime.	13:24
	They will be looking for funds to finance them.	13:27
	Thus, we are likely to have	13:30
	a fairly large demand for long-term funds.	13:31
	Thus, my own belief is that the most likely pattern,	13:38
	the most likely way in which the interest rate	13:43
	structure is going to resume its more normal shape is	13:46
	by both short and long rates contributing to it.	13:49
	That is short rates will tend to come down,	13:53
	and long rates will tend to go up.	13:55
	That doesn't mean that short rates	13:58
	may not go up for a while.	14:00
	I'm talking about what may happen	14:02
	over the next three, four, five, six months,	14:03
	and it's over that period that I think	14:06
	the most likely development is a rise	14:08
	in long-term rates, a decline in short-term rates.	14:10
Rose	Let's answer some questions that are	14:14
	from subscribers that have come in.	14:16
	Carl Dull from Integon Corporation writes,	14:20
	"You said that the monetary expansion in 1972	14:23
	"was not the cause of the high rate of inflation in 1973.	14:26
	"We have reasoned that if the expansion	14:31
	"of the money supply in '72 had been held to 6%,	14:33
	"which Mr. Burns set as his goal,	14:37
	"rather than the 8.5% which took place,	14:39
	"then business activity would have been much less	14:42
	"about bully and demand less great.	14:45
	"Thus, prices for most items would be more stable.	14:47
	"Admittedly, items in short supply	14:51
	"such as certain foods would have price pressures,	14:53
	"but on the whole, inflation would be much less	14:56
	"with the less bully economy.	14:58
	"Please clarify this matter for us."	15:00
Milton	There is really no difference of opinion	15:02
	between us on this matter.	15:04
	Mr. Dull is certainly right that	15:08
	if monetary expansion had been 6% instead of 8.5%	15:11
	you would've had a less inflationary atmosphere.	15:15
	Prices would have risen less rapidly.	15:18
	I certainly agree with him on that.	15:21
	I have long believed that monetary expansion	15:22
	in '72 was too high and should have been lower.	15:25
	My point was rather a different one.	15:28
	It has to do with the magnitude of the inflation,	15:30
	not the existence of the inflation.	15:32
	The high rate of monetary expansion in '72 set a basis	15:34
	for the inflation, but it, by itself,	15:38
	would not have produced a rate of inflation	15:40
	as high numerically as the one we did experience.	15:43
	On the basis of past evidence,	15:46
	on the the basis of the relationship that has prevailed	15:50
	in the past between the rate of monetary growth	15:52
	and the rate of income growth,	15:56
	you would never have gotten something	15:59
	like a 14% rate of growth in GNP	16:01
	in the first quarter of 1973.	16:04
	You might've gotten one of about 10% or 11%.	16:07
	That would still have been too high.	16:09
	You never would've gotten the rate	16:12
	of inflation of CPI at 9%.	16:13
	You might've gotten one of 6%.	16:16
	That would've still been too high.	16:17
	It was this difference between the actual rate of inflation	16:19
	and the rate of inflation that would've been associated	16:23
	with the unduly high monetary growth that I was referring to	16:26
	when I said that the monetary expansion	16:29
	in 1972 was not the cause of the numerical value	16:32
	of the rate of inflation in '73.	16:37
Rose	Mr. John Cassen from Brown Brothers Harriman	16:40
	sent the following letter.	16:43
	"I have been interested in your recent remarks	16:45
	"on how the lags between changes in monetary growth	16:48
	"and their impact on the economy appear to have widened.	16:51
	"Any further comment that you might make	16:54
	"on this subject would be greatly appreciated."	16:56
Milton	Well I'm afraid there is some misunderstanding.	16:59
	I do not believe I have said that there has been	17:02
	any widening in the lags between changes	17:06
	between monetary growth and their impact on the economy.	17:08
	I believe Mr. Cassen must be referring	17:11
	to a very different comment which is the difference	17:14
	between the lag as it affects physical output	17:17
	and the lag as it affects prices or inflation.	17:22
	As far back as we have evidence, and I may say not only	17:27
	for the United States but for other countries,	17:31
	if you compare the rate of change of the money supply	17:33
	on the one hand with the rate of change of economic activity	17:36
	on the other of physical activity of industrial production,	17:41
	real GNP and so on, there is a time difference	17:44
	of about six to nine months between those two.	17:49
	That's true for the United States so far as we can tell	17:52
	all the way back to the 1870s or 80s.	17:56
	It's true for Japan. It's true for Israel.	17:59
	It's true for whatever other countries	18:01
	I have been able to get figures for.	18:03
	Since the movements in physical output tend to go along	18:05
	with the movements in nominal GNP, in dollar value of GNP,	18:08
	it is also true that the lag between changes	18:12
	in monetary growth and changes in nominal dollar income	18:15
	also tend to be about six to nine months,	18:20
	a little bit longer, maybe on the nine month side	18:22
	rather than the six month side	18:25
	while the physical output will be	18:27
	on the six month side rather than the nine month.	18:28
	However, if you separate out the price component of income,	18:31
	independently from the physical output,	18:35
	whether you take an index number, like Consumer Price Index,	18:37
	or an index number, like the implicit index	18:41
	used in calculating real GNP,	18:45
	then you find that the time span,	18:49
	the time difference between changes in monetary growth	18:52
	and changes in prices is very much longer,	18:55
	more nearly of the order of 20 to 24 months.	18:58
	That is a year and a half to two years.	19:02
	This is of course very clearly illustrated	19:05
	by our recent experience.	19:09
	We had a slowdown in the rate of monetary growth	19:11
	in the beginning of 1969.	19:16
	We had a slowdown in the rate of economic growth	19:18
	about six to nine months later at the end of '69,	19:21
	but we did not have a real slowdown in the rate of inflation	19:24
	until well on into 1970 or early 1971.	19:28
	A substantial slowdown.	19:33
	You had an end to the inflation rates getting higher	19:35
	and higher but they stayed high,	19:39
	and you cannot really find very much of a turn	19:40
	until you come to something like the end of 1970,	19:44
	which is almost a two year lag.	19:46
	Now our evidence on this relationship has not been explored	19:49
	as fully as on the relationship between monetary growth	19:54
	and physical output, so I have to speak	19:58
	with a little bit less confidence.	20:01
	But I have, I believe in this respect,	20:03
	it may be that this lag has increased in recent decades	20:06
	over what it was much earlier.	20:10
	I suspect that in an earlier period, like the 1870s,	20:12
	or in countries which have a much more flexible price system	20:17
	than we do, this lag may be smaller,	20:22
	but I cannot really document that very carefully.	20:24
	In any event, the main point I wanna make is that	20:27
	insofar as there has been any widening in the lag,	20:29
	it has to do with the lag between monetary change	20:32
	and price change, not with a lag	20:36
	between monetary change and physical economic change.	20:38
Rose	Another subscriber, Michael Morgue, asks a question	20:42
	which is closely related to our preceding one.	20:45
	He writes, "In a tape, you said that it typically took	20:49
	"20 to 24 months for an increase	20:53
	"in the money supply to be reflected in prices.	20:55
	"My question is isn't the time period determined	20:58
	"by our current plant utilization and unemployment rate	21:01
	"at the time the money supply is being increased?"	21:04
Milton	Well you would think that that would be the case,	21:07
	and of course the most widely accepted views	21:10
	about the way the economy works, that is the Keynesian views	21:15
	which would emphasize the relationship	21:18
	between spending and income, would argue along those lines.	21:20
	That as those views say as long as there's unused capacity,	21:25
	any increase in income will take the form	21:28
	of an increase in output and not an increase in prices.	21:30
	Yet the historical evidence does not really fit	21:34
	that pattern very much.	21:36
	It is clear that, in the first place, that there	21:39
	is no such thing as really full utilization of capacity.	21:43
	You can overutilize capacity	21:46
	as well as underutilize capacity.	21:48
	We have hardly ever hit the time when we had any kind	21:50
	of an absolute ceiling on capacity.	21:53
	In the next place, it turns out that	21:57
	if you wanna know how rapidly prices will go up,	21:59
	for example during a business cycle expansion,	22:03
	you will get much more information	22:06
	by asking how fast have prices been going up in the past	22:08
	than you will be asking how large was the rate	22:12
	of unemployment at the beginning of the expansion.	22:17
	So that in fact the empirical evidence suggests	22:20
	that the rate of utilization of capacity,	22:23
	while it does have some relationship to the fraction	22:25
	of an increase in income, which will take the form of prices	22:28
	and a fraction which will take the form of output,	22:31
	has a much looser relationship than one might	22:33
	suppose a priori or than many people have supposed.	22:37
	As a consequence, to the best of my knowledge,	22:41
	the time lag between a change in monetary growth	22:46
	and a change in prices is not really significantly affected	22:50
	by the level of unemployment.	22:56
	Now I have not explored this particular question	22:59
	as fully as I have explored another question.	23:02
	I have explored the question of whether the time lag	23:05
	between a change in monetary growth	23:10
	and a change in economic activity is related to	23:12
	whether you have a vigorous expansion or a slow expansion,	23:16
	whether you're in a big boom or a small boom,	23:19
	whether you're in a contraction of minor or major form.	23:21
	A priori, one would expect there, too,	23:25
	your expectation would be that if you were	23:28
	in a very sharp boom, it would take a longer time	23:31
	for a slowdown in monetary growth to start biting	23:36
	than if you were in a very mild boom.	23:40
	Similarly with respect to an expansion of monetary growth,	23:43
	yet I have been able to find no such differences at all.	23:47
	So far as I can tell, the time delay between monetary change	23:51
	and economic change is the same for expansions	23:57
	as it is for contractions.	23:59
	It's the same for rapid expansions	24:00
	as it is for slow expansions and so on.	24:03
	This rather confirms me in my belief	24:07
	that probably the same thing is true for the relation	24:10
	between monetary change on the one hand	24:13
	and price change on the other.	24:15
	Now I think another factor is far more important,	24:18
	and that's a factor that it's hard to evaluate.	24:21
	Consider a country in which price change	24:24
	has been very variable, in which you have gone	24:28
	from large inflations to small inflations	24:31
	to deflations over short periods of time,	24:34
	a country like Chile or Argentina or Brazil.	24:36
	There seems to be little doubt that in such a country	24:40
	the time delay between a change in monetary growth	24:43
	and a change in the rate of inflation is much briefer	24:47
	than in a country like the United States	24:51
	in which you have had relatively stable prices.	24:53
	So I think the more important factor about the lag	24:55
	between monetary change and price change is really	25:00
	the degree of variability in past inflation rather than the	25:04
	extent of utilization of your plant and equipment.	25:09
Rose	Mr. Morgue has two more questions.	25:13
	I'm not sure we'll have time	25:16
	for both of them, but we'll try.	25:17
	The first one is, "If the domestic money supply	25:19
	"is increased by X amount of dollars,	25:22
	"but this increase goes overseas, what effect does this have	25:24
	"on our money supply as it relates	25:28
	"to increasing business activity, the stock market, etc.?"	25:30
Milton	Well that's a very hard question	25:33
	to answer because it's a hard question	25:35
	to define precisely what it means.	25:36
	Mr. Morgue expresses his question in relation	25:39
	to the eurodollar market and sort of implies,	25:43
	there is implicit in his question,	25:47
	the notion that the eurodollar market is fed	25:49
	by dollars going overseas that an increase	25:54
	in the number of dollars deposited	25:57
	in the eurodollar market is equivalent to U.S. dollars.	25:58
	In an image which he doesn't intend	26:02
	and which goes much farther, the image that you have	26:04
	is that of greenbacks being wrapped up in packages,	26:07
	put on a boat, and shipped overseas.	26:09
	Well that isn't the way it happens at all.	26:11
	The expansion in eurodollar markets, typically speaking,	26:13
	is not at the expense of any increase	26:16
	in the amount of money in the United States.	26:19
	It's a case of the creation of dollars by European banks.	26:21
	Those dollars are not included	26:25
	in the U.S. money supply figures,	26:27
	and if we have an increase in the U.S. money supply figures,	26:29
	that is completely independent in the first instance	26:32
	of any change in the amount of eurodollars abroad.	26:36
	The only way in which those dollars can,	26:41
	in a meaningful sense, go abroad is if they are held	26:43
	by a foreign bank or a foreign resident,	26:47
	but they are held in the United States	26:50
	because dollars held by foreign banks	26:52
	and foreign residents are included in the U.S. money supply.	26:54
	Now if there were an increase in the U.S. money supply,	27:01
	as recorded, which was held by, let us say, a foreign bank,	27:06
	one would a priori expect that increase to have less	27:11
	of an expansionary effect on U.S. economic activity	27:15
	than if it were held by a U.S. citizen.	27:18
	But of course that depends on why the foreign bank	27:22
	wants to hold the dollars.	27:25
	Perhaps it wants to hold the dollars	27:26
	because it is in the process of financing the acquisition,	27:27
	for example of a U.S. plant by a foreign company.	27:31
	If that is the case, why then,	27:35
	this is a very temporary phenomenon.	27:37
	In the main, I think it is very hard	27:39
	to make any clear definite statement along these lines.	27:41
	We know all too little about the effect of the composition	27:44
	of the dollar and money supply upon its effect	27:48
	on the economy to be able to make	27:50
	any sophisticated statements along these lines.	27:52
Rose	He has one additional question	27:55
	relating to money held abroad,	27:58
	and perhaps you can answer it briefly.	28:00
	"In what we define as our money supply	28:01
	"which is currently $258 billion,	28:03
	"does this figure include money held in foreign banks?"	28:06
Milton	The answer is no, it does not.	28:09
	It neither includes dollar liabilities of eurodollar banks,	28:11
	whether to American residents or others,	28:18
	nor does it include the dollars held by U.S.	28:21
	I'm sorry.	28:25
	Neither does it include foreign currencies held	28:26
	by U.S. citizens in foreign banks.	28:29
	If a U.S. citizen has a pound deposit in a British bank,	28:31
	that is not included in the U.S. money supply.	28:34
	The figure does include, however,	28:36
	deposits held at banks in the United States	28:40
	by foreign banks and by foreign individuals.	28:44
	It does not include any money held	28:49
	by anybody in any foreign bank.	28:51
Rose	That brings us to the end of this tape.	28:53
	Thank you very much.	28:56
	Remember subscribers, if you have any questions or comments,	28:57
	please send them to Instructional Dynamics Incorporated.	29:00
	166 East Superior Street, Chicago, Illinois, 60611.	29:03
	We shall be visiting with you again in two weeks.	29:09

Item Info

Title:

Tape 124 - The German Mark, Federal Reserve Action, Interest Rates, Subscribers Queries

Date:

July 4, 1973

Contributor:

Friedman, Milton, 1912-2006

Subject:

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audiocassettes

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English

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Paul A. Samuelson papers, 1933-2010 and undated

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Paul A. Samuelson papers, 1933-2010

Series:

Economics Cassette Series: Milton Friedman

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ref2710_m5y
samuelsonpaul
duke:325307
pstau001284
ark:/87924/r4xg9ft38
bd04f51d-0bd4-477b-a804-e27af7fc4ffc

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Tape 124 - The German Mark, Federal Reserve Action, Interest Rates, Subscribers Queries

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