Tape 151 - Implications of Prospective End of Nixon Presidency, Retrospective on Nixon Years, Commercial and Industrial Loans
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- | Hello, this is Rose Friedman inviting you | 0:04 |
on behalf of Instructional Dynamics | 0:07 | |
to another of our bi-weekly conversations | 0:09 | |
with Milton Friedman, professor of economics | 0:11 | |
at the University of Chicago. | 0:14 | |
We are taping this conversation | 0:15 | |
on Wednesday August 7th, 1974. | 0:17 | |
As we tape this conversation, it seems increasingly clear | 0:23 | |
that Mr. Nixon is not likely to survive for long | 0:27 | |
in the presidency. | 0:30 | |
- | That certainly is the case. | 0:31 |
The revelations that came out two days ago, on Monday, | 0:33 | |
seem to make that inevitable. | 0:40 | |
What has been going on is a true Greek tragedy | 0:42 | |
in every sense of the word. | 0:44 | |
A Greek tragedy for Mr. Nixon personally, | 0:46 | |
for those who, over the years, have supported him, | 0:49 | |
and for the nation as a whole. | 0:51 | |
It is a Greek tragedy not only in the sense | 0:53 | |
that one development seems to follow from the other | 0:56 | |
with utter inevitability | 0:59 | |
toward ever deeper trouble, | 1:03 | |
but it is a Greek tragedy in a more direct sense, | 1:06 | |
that the essential ingredient of the Greek tragedy | 1:10 | |
was almost invariably hubris, | 1:13 | |
pride going before us, before a fall. | 1:15 | |
And that seems to have played an enormously large role | 1:19 | |
in the Greek tragedy that is unfolding in Washington today. | 1:23 | |
It was the pride and the desire to assure | 1:26 | |
a complete victory in 1972 in the elections | 1:30 | |
that led Mr. Nixon to approve of the activities | 1:34 | |
that went underway. | 1:37 | |
It was pride and hubris that led him to order | 1:39 | |
a taping of his conversations, | 1:41 | |
an act which if it had never occurred | 1:43 | |
would have almost surely meant | 1:46 | |
that the situation would have developed | 1:49 | |
in a wholly different way | 1:51 | |
and he would never be in the problem, | 1:52 | |
in the situation he was, he is now. | 1:53 | |
It was the enact of hubris that led him, | 1:57 | |
after the existence of the tapes was made known, | 1:59 | |
to turn down the advice of some of his close associates | 2:04 | |
that in in order to preserve | 2:07 | |
the confidentiality of his tapes he should | 2:08 | |
erase the whole of them. | 2:13 | |
At each step of the way, that has been the case. | 2:16 | |
The extraordinary thing about the whole episode | 2:18 | |
is that we have here a man of great ability, | 2:21 | |
of high intellectual quality, | 2:26 | |
who has demonstrated by his performance | 2:30 | |
his political sagacity and capacity, | 2:32 | |
and yet even to the most uninstructed, naive citizen, | 2:36 | |
his whole behavior over the past year or so, | 2:40 | |
ever since the Watergate affair started, seems to consist of | 2:44 | |
one incomprehensible mistake after another. | 2:48 | |
And it is hard to attribute that sequence of mistakes | 2:53 | |
to anything but this same quality of hubris. | 2:55 | |
- | Why should the stock market | 3:00 |
have taken this latest blow as a bullish sign? | 3:01 | |
- | Well, that's very simple. | 3:05 |
The essential thing, | 3:06 | |
one essential feature of the stock market is that it hates, | 3:08 | |
that is, the people who are participating | 3:12 | |
in the stock market hate uncertainty. | 3:14 | |
Certainly, one of the things | 3:17 | |
that has been driving down the stock market | 3:19 | |
is the uncertainty about what was coming. | 3:22 | |
Were we in for a three or four month period | 3:25 | |
of trials in the senate in which all other business in the, | 3:29 | |
all other governmental business in the United States | 3:33 | |
would be more or less put on the shelf? | 3:36 | |
In which there would be the possibility | 3:39 | |
of divisive moves within the country, | 3:41 | |
of a destruction of the harmony | 3:44 | |
and confidence of the community at large? | 3:47 | |
Or were we in for a dramatic change | 3:52 | |
in presidency very quickly? | 3:54 | |
Now, it's important to note that, | 3:56 | |
in judging matters like this, | 4:01 | |
there are two pairs of distinctions that are important. | 4:03 | |
One must distinguish between expected | 4:09 | |
or average values in the future | 4:12 | |
and the uncertainty about those values. | 4:14 | |
Let me illustrate. | 4:18 | |
When World War I and II broke out, | 4:20 | |
II in Europe in September 1939 and especially that occasion, | 4:23 | |
one would have thought that almost everybody | 4:29 | |
would have anticipated that it would | 4:32 | |
sooner or later produce inflation | 4:34 | |
and that as a result of producing inflation, | 4:37 | |
that would tend to raise stock prices | 4:39 | |
and also commodity prices. | 4:43 | |
The effect of the outbreak of the war was surely, | 4:45 | |
by any reasonable anticipation, | 4:47 | |
to raise the average expected value | 4:49 | |
of the prices in these areas. | 4:53 | |
Yet, both commodity prices and stock prices fell | 4:56 | |
immediately on the outbreak of the war. | 5:00 | |
Why? Because while there | 5:01 | |
might have been a higher average value, | 5:03 | |
it was a much greater degree of uncertainty | 5:05 | |
around that average value, | 5:07 | |
a much greater range of possibilities. | 5:09 | |
It might be very high, it might be very low. | 5:11 | |
It might be a disaster. | 5:13 | |
That's one distinction | 5:15 | |
between the mean and the average value, | 5:16 | |
but another distinction is between | 5:18 | |
uncertainty about the state of the world in general | 5:20 | |
and uncertainty about the particular commodities | 5:22 | |
or stocks in which people transact their business. | 5:25 | |
Again, to take the same case, the... | 5:29 | |
Even though, if you looked, | 5:33 | |
for example, at the price of copper, | 5:36 | |
I haven't gone back to look at the figures, | 5:38 | |
but my recollection is that all commodity prices | 5:40 | |
almost fell immediately on the outbreak of war | 5:42 | |
in September 1939, | 5:44 | |
you might say, "Well, the expected value of copper | 5:47 | |
"is gonna be higher," | 5:49 | |
but on the other hand, participants in the copper market | 5:51 | |
who are going to benefit from that | 5:55 | |
would have to commit themselves to tie up funds | 5:56 | |
to become more illiquid in order to purchase copper stocks. | 5:59 | |
And here they were in a state of the world | 6:04 | |
where they couldn't know | 6:05 | |
what in the world was going to happen. | 6:06 | |
Was this a phony war? | 6:08 | |
Was it going to be ended soon? | 6:10 | |
Was Germany going to overrun France? | 6:12 | |
Was France going to overrun Germany? | 6:15 | |
Would the United States be dragged in? | 6:17 | |
Would it be over in three months, six months, a year? | 6:20 | |
How much of the world would go down in flames? | 6:22 | |
And so on and so on. | 6:24 | |
Given such uncertainty about the world in general, | 6:26 | |
the wise man wants to keep himself in a flexible position, | 6:30 | |
to take advantage of opportunities that may develop | 6:33 | |
or to protect himself from catastrophes that may develop. | 6:36 | |
And thus, he will be highly desirous | 6:40 | |
to be in a more liquid position, | 6:43 | |
to have his funds in readily available forms | 6:46 | |
and much less willing to undertake ventures, | 6:48 | |
in copper, for example. | 6:51 | |
Now, even with respect to copper as I say, | 6:54 | |
there is great uncertainty along the same lines | 6:57 | |
even thought the mean value may be higher. | 7:00 | |
But I suspect that the more important factor | 7:03 | |
that accounts for this kind of a phenomenon | 7:05 | |
is the enormous growth in general uncertainty. | 7:07 | |
Well, coming back to the immediate situation, | 7:10 | |
surely that has been the situation here. | 7:12 | |
Everybody has been very uncertain | 7:15 | |
about what was going to go on, | 7:17 | |
what was going to happen, | 7:18 | |
what the state of the world was gonna be like, | 7:19 | |
what opportunities or problems were going to arise. | 7:21 | |
And, of course, that uncertainty has been intensified, | 7:25 | |
not only by the political situation in Washington | 7:28 | |
but by such events as the failure of the German bank, | 7:31 | |
the difficulties of Franklin National Bank, | 7:36 | |
the extremely diverse profit experience | 7:40 | |
of various companies. | 7:43 | |
The sudden appearance of the smoking pistol, | 7:45 | |
as it was referred to in some of the Watergate business, | 7:49 | |
and the immediate move toward an essentially unanimous | 7:54 | |
position in favor of impeachment | 8:00 | |
by the House of Representatives and by the Senate | 8:02 | |
seems to reduce, does in fact reduce | 8:06 | |
the degree of uncertainty about the state of the world. | 8:09 | |
And thus, it makes people willing to part with liquidity | 8:13 | |
and to undertake some of the ventures | 8:17 | |
that they have been considering all along. | 8:19 | |
Everybody has known that there are | 8:21 | |
big bargains in the stock market, | 8:22 | |
but the question is there might be bigger bargains yet. | 8:24 | |
And consequently, the elimination of the uncertainty | 8:27 | |
produced a sharp rise in the market. | 8:32 | |
Now, that doesn't mean that the market is right. | 8:34 | |
That doesn't mean that, really, | 8:36 | |
the elimination of Mr. Nixon is a good thing. | 8:37 | |
Let me illustrate. | 8:40 | |
In August 1971, after wage and price controls were announced | 8:41 | |
the market made an enormous jump. | 8:47 | |
I believe a much bigger jump than it made | 8:50 | |
on Monday of this week on the Watergate business. | 8:52 | |
The market thought that uncertainty had been reduced | 8:55 | |
because the government, in its opinion, | 8:59 | |
was taking decisive action to stem inflation. | 9:01 | |
Now, the market was wrong. | 9:04 | |
The decisive action which the government took was, | 9:06 | |
ultimately, to have the effect | 9:09 | |
of increasing, not reducing, inflation. | 9:10 | |
And it is worth noting that on the next occasion | 9:14 | |
when Mr. Nixon imposed price and wage controls, | 9:16 | |
in the spring of, June I guess it was, of 1973, | 9:19 | |
the market reacted very differently and did not jump. | 9:23 | |
I don't remember exactly what it did, | 9:26 | |
but it did not move, if I remember rightly, | 9:28 | |
very much in either direction. | 9:30 | |
So, the market apperception | 9:32 | |
may, of course, turn out to be false, | 9:35 | |
but nonetheless I think it's not hard to see | 9:37 | |
why the market takes it as a favorable sign. | 9:39 | |
- | What implications does a change of guard have | 9:42 |
on the prospects for the economy? | 9:45 | |
- | I must confess that I do not know | 9:48 |
how to answer that question with any confidence. | 9:50 | |
The policies Mr. Nixon has recently announced | 9:55 | |
are the right policies. | 9:59 | |
In direction, they are a return to the policies | 10:01 | |
which he followed before August 15th, 1971. | 10:03 | |
No price and wage controls, moderate fiscal policy, | 10:07 | |
moderate monetary policy. | 10:09 | |
But the implementation of them is the real question. | 10:11 | |
I have, over and over, emphasized the contrast | 10:16 | |
between the word which the Federal Reserve utters | 10:19 | |
on the subject of monetary policy and its actions. | 10:23 | |
Now, the question is, | 10:27 | |
first, will the new guard want to continue that same policy? | 10:29 | |
Second, will they be able to carry it out | 10:34 | |
more effectively than Mr. Nixon could carry it out? | 10:37 | |
With respect to the first, | 10:43 | |
I think the odds are very heavy that the new, | 10:46 | |
that Mr. Ford will want to continue the same policy. | 10:48 | |
Mr. Ford has, in general, had a large measure of agreement | 10:53 | |
with the basic principles of Mr. Nixon. | 10:57 | |
It seems clear that he will continue, | 11:00 | |
essentially, the same economic advisors | 11:02 | |
in the sense that Alan Greenspan, | 11:05 | |
about whom we spoke on our last past last tape, will | 11:07 | |
be coming in on September 1st. | 11:11 | |
Perhaps Mr. Ford... | 11:15 | |
No doubt, Alan will offer Mr. Ford his resignation, | 11:17 | |
but I should be amazed if Mr. Ford took it. | 11:21 | |
I am sure that Mr. Ford's desire | 11:23 | |
will be to keep Alan Greenspan as chairman of the council. | 11:26 | |
I suspect that Bill Simon will stay | 11:31 | |
at Secretary of the Treasury. | 11:33 | |
In fact, if you ask, "What is the intelligent, | 11:34 | |
"reasonable, responsible policy for Mr. Ford to follow?" | 11:36 | |
it would seem, off hand, that it is surely | 11:41 | |
to try to introduce as few disturbing elements | 11:44 | |
in the situation as possible, | 11:47 | |
to build on what elements of strength remain | 11:49 | |
in the Republican Nixon administration. | 11:51 | |
And those elements of strength as he will perceive them, | 11:55 | |
and as I think the public at large | 11:57 | |
and the informed pubic perceives them, | 11:59 | |
include Mr. Simon at the treasury, | 12:01 | |
Mr. Weinberger at HEW, | 12:04 | |
the Federal Reserve, | 12:09 | |
and Mr. Greenspan at the Council of Economic Advisors. | 12:12 | |
Under these circumstances, it would seem that | 12:20 | |
Mr. Ford would get, essentially, the same economic advice | 12:23 | |
that Mr. Nixon would have been getting and was getting. | 12:26 | |
Will he be able to carry these out more effectively? | 12:32 | |
Certain of them, obviously, yes. | 12:36 | |
To begin with, there will be a honeymoon | 12:38 | |
between Mr. Ford and the Congress. | 12:40 | |
He is, in any event, a creature of the Congress. | 12:42 | |
He is, in any event, much closer in tune | 12:45 | |
with the House than was Mr, Nixon | 12:48 | |
and will be able to have a more sensitive | 12:50 | |
antenna toward the House. | 12:52 | |
I would suspect | 12:55 | |
that Melvin Laird, former Secretary of Defense, | 12:57 | |
a close associate of Mr. Ford over many years | 13:02 | |
in the House of Representatives, | 13:05 | |
would play an important role in the Ford administration. | 13:07 | |
Mr. Laird, too, is extremely close to people in the Congress | 13:11 | |
and very effective at reading congressional sentiment. | 13:15 | |
And thus, I can well believe | 13:20 | |
that Mr. Ford could be far more successful than Mr. Nixon | 13:22 | |
in getting effective measures | 13:26 | |
to hold down governmental spending. | 13:28 | |
If he could get effective measures | 13:32 | |
to hold down governmental spending, | 13:33 | |
that would certainly encourage the Federal Reserve | 13:35 | |
to hold down the rate of monetary increase. | 13:38 | |
In consequence, | 13:41 | |
it is not to be ruled out that the change in administration | 13:44 | |
would produce a fiscal and monetary posture | 13:49 | |
that would be less inflationary | 13:53 | |
or more anti-inflationary than the present one. | 13:56 | |
But here's where the imponderables start to come in. | 14:00 | |
Because, after a few months, that will also mean, | 14:05 | |
very likely, that unemployment in the short run | 14:09 | |
will rise more rapidly than it otherwise would. | 14:12 | |
And the questions is, what further effects will that have | 14:15 | |
in the new political climate, in which, very rapidly, | 14:19 | |
the honeymoon that Mr. Ford would be enjoying | 14:22 | |
will be disappearing? | 14:24 | |
And he will be now cast in the role | 14:26 | |
of a candidate for the 1976 presidential nomination. | 14:30 | |
We're now in the... | 14:34 | |
So, I think that that crystal ball is extremely clouded. | 14:38 | |
I must say, I was discouraged, | 14:42 | |
in contemplating that crystal ball, | 14:45 | |
by the story in this morning's paper | 14:47 | |
about Arthur Burns's testimony | 14:49 | |
before the Joint Economic Committee yesterday. | 14:51 | |
I heartily endorse and welcome Arthur Burns's call | 14:57 | |
for a 10 billion dollar reduction in the federal budget, | 15:01 | |
but the remainder of his policy recommendations | 15:05 | |
were not good auguries. | 15:09 | |
He recommended an agreement among oil consuming nations | 15:12 | |
to try to drive down the international oil price of oil. | 15:16 | |
I don't believe producer cartels hold up, | 15:20 | |
I don't think consumer cartels hold up. | 15:22 | |
I think that would be pure window dressing, | 15:24 | |
but the market price of oil is, | 15:27 | |
in any event, going to come down. | 15:28 | |
But it has no great importance for the domestic scene. | 15:30 | |
Much more important were two other elements, | 15:33 | |
his call for a strengthened, | 15:36 | |
for a return to a cost of living council | 15:38 | |
which would monitor wage and price control | 15:42 | |
and which would have some power | 15:44 | |
to postpone large wage and price increases. | 15:46 | |
Any such move would be a major threat | 15:50 | |
to the retention of a free market | 15:53 | |
and to the avoidance of wage and price controls. | 15:56 | |
In some ways, even more troublesome | 16:02 | |
was a paragraph in the story which said, and I quote, | 16:03 | |
if the nation's jobless rates hit 6%, however, | 16:06 | |
Mr. Burns said he favors a four billion dollar | 16:10 | |
public service employment program by the government | 16:13 | |
that would provide jobs for 800,000 persons, unquote. | 16:16 | |
- | What's wrong with that? | 16:20 |
Isn't it going, won't it prevent a lot of suffering | 16:21 | |
as a result of unemployment? | 16:24 | |
- | Well, this is just another one of those short-sighted, | 16:26 |
not thought through programs that have been so, | 16:28 | |
that have backfired so much over the course of years. | 16:33 | |
Consider a government public service program | 16:37 | |
and ask where does the government | 16:40 | |
get the four billion dollars which it's going to spend, | 16:41 | |
supposedly to provide jobs for 800,000 persons? | 16:43 | |
If it gets that four billion dollars | 16:47 | |
by imposing taxes on other people, | 16:49 | |
then the people who pay the taxes will hire fewer people. | 16:51 | |
There are no net jobs creation, created. | 16:54 | |
There are only people now working for the government | 16:56 | |
instead of for the taxpayer. | 16:59 | |
If it gets the money by borrowing from the public at large | 17:00 | |
at high, at whatever interest rate it has to pay, | 17:04 | |
then, again, the jobs created by the government | 17:07 | |
are balanced by the jobs that are lost | 17:09 | |
in the private sector. | 17:11 | |
Is there really, does it really improve matters | 17:12 | |
and keep down unemployment | 17:14 | |
for the government to employ people instead of | 17:15 | |
for a housing firm or a construction firm to employ them? | 17:21 | |
The third possibility is | 17:25 | |
that it gets the four billion dollars by printing the money. | 17:27 | |
But then, that's inflationary. | 17:30 | |
If it prints this, spends printed money for this purpose | 17:32 | |
instead of for something else, | 17:35 | |
there's no net increase to demand. | 17:37 | |
If you really are going to keep, to hold down inflation, | 17:39 | |
you mustn't kid yourself. | 17:43 | |
You mustn't suppose that you can hold down inflation | 17:44 | |
without producing a reduction in total spending. | 17:46 | |
And you can't produce a reduction in total spending | 17:48 | |
if, to offset any such reduction, | 17:51 | |
the government starts printing money | 17:53 | |
in order to provide public service employment. | 17:55 | |
And thus, | 17:58 | |
this is one of those, | 18:00 | |
as Burke says somewhere, one of those plausible schemes | 18:04 | |
which misleads you in the long run. | 18:07 | |
It's creating jobs with the right hand | 18:11 | |
and eliminating jobs with the left hand. | 18:15 | |
- | I know that you just talked to a New York Times reporter | 18:18 |
who is doing a story on the economics, | 18:21 | |
of the economic aspects of the Nixon administration. | 18:24 | |
I think your subscribers would be interested | 18:28 | |
in what you told him. | 18:30 | |
- | Well, I said to him that it seemed to me, | 18:32 |
in retrospect, as you looked at the Nixon administration, | 18:35 | |
August 15th, 1971 was a watershed in that administration, | 18:40 | |
a point that my subscribers will not find strange | 18:44 | |
or novel coming from me. | 18:48 | |
But it's interesting, as you look back, | 18:51 | |
to see that it was a watershed | 18:53 | |
which had precisely the opposite significance | 18:56 | |
for domestic policies and for international policies. | 19:00 | |
Consider the domestic policies. | 19:06 | |
Prior to August 15th, 1971, | 19:08 | |
Mr. Nixon was following what I regarded then | 19:11 | |
and regard now as, on the whole, | 19:14 | |
and admirable and excellent policy. | 19:16 | |
It was the same three-pronged policy | 19:19 | |
that he announced in his recent speech | 19:22 | |
he was going to revert to now, | 19:23 | |
no wage and price controls, | 19:26 | |
reduction in the rate of government spending, | 19:30 | |
and that is fiscal restraint, | 19:32 | |
a slow rate of growth in the quantity of money, | 19:35 | |
that is monetary restraint. | 19:37 | |
That policy had not been executed fully, | 19:42 | |
and particularly in the monetary area, | 19:45 | |
it had left much to be desired. | 19:47 | |
But yet, on the whole, the general thrust of policy | 19:49 | |
was in the direction of those three measures, | 19:52 | |
the three steps. | 19:54 | |
Moreover, Mr. Nixon had taken great efforts | 19:57 | |
to try to educate the public about the | 20:00 | |
virtues of a free market, | 20:04 | |
about the evils of imposing price and wage control. | 20:07 | |
In speech after speech, he had talked against it. | 20:10 | |
And the policy was working. | 20:14 | |
In early 1969, when Mr. Nixon was inaugurated, | 20:18 | |
inflation was running at the rate | 20:20 | |
of somewhere between six and 7% a year. | 20:22 | |
By August 15th, 1971, inflation was running, | 20:25 | |
measured by cost of living, | 20:28 | |
at about four and a half percent a year. | 20:29 | |
We had suffered, experienced a recession in 1970, | 20:32 | |
but it was the mildest recession in the post-war period | 20:37 | |
and one of the mildest in US history. | 20:39 | |
The economy, by mid-1971 was expanding. | 20:42 | |
So, if you stop on August 15th, 1971, and look back, | 20:45 | |
you have to give Mr. Nixon high marks for domestic policy | 20:49 | |
and you have to say that policy was working. | 20:52 | |
On August 15th, 1971, he imposed price and wage controls, | 20:57 | |
and in my opinion, Mr. Nixon | 21:00 | |
did far more harm to this country | 21:03 | |
in the long run by that act, | 21:05 | |
which went against his own deeply held long run principles, | 21:08 | |
than he did by anything that, any of the misdeeds, | 21:12 | |
and they certainly are misdeeds, | 21:15 | |
that come under the rubric of Watergate. | 21:16 | |
It was the first time in American history | 21:20 | |
that price and wage controls had been imposed | 21:25 | |
in time of peace when there was no obvious emergency. | 21:28 | |
- | And by a Republican president. | 21:32 |
- | And by a Republican president, quite right. | 21:33 |
Against his own basic principles | 21:36 | |
and against the principles that, supposedly, | 21:38 | |
his party had always stood for. | 21:40 | |
We shall long pay a heavy price for that act. | 21:44 | |
The result economically | 21:48 | |
has been catastrophic. | 21:51 | |
At the risk of appearing to be self-serving, | 21:59 | |
I cannot forebear from repeating | 22:01 | |
that this is not hindsight, | 22:03 | |
that this is what I said at the time, | 22:05 | |
that I said at the time that undercover | 22:07 | |
of these price and wage controls, | 22:09 | |
inflationary forces would build up, be repressed, | 22:12 | |
and sooner or later break out into the open. | 22:15 | |
And that is, of course, what happened. | 22:18 | |
Because Mr. Nixon not only imposed price and wage controls, | 22:22 | |
which violated the first of his three phase program, | 22:25 | |
but he also encouraged an expansive, | 22:30 | |
a much more expansive and inflationary fiscal policy | 22:33 | |
and the Federal reserve undertook | 22:37 | |
a much more expansive monetary policy. | 22:39 | |
So, on all sides, you had the situation | 22:41 | |
that I described at the time | 22:44 | |
as putting a brick on top of the kettle | 22:46 | |
and turning up the flame under the kettle. | 22:48 | |
And finally, the lid blew off in early, in 1973, and then | 22:50 | |
to multiply his mistake, | 22:58 | |
Mr. Nixon imposed a second price and wage control in 1973, | 23:03 | |
which fortunately did not last nearly as long as the first. | 23:09 | |
And once, in early 1974, | 23:14 | |
all of the price and wage controls more or less disappeared, | 23:17 | |
we experienced this explosive inflation | 23:23 | |
which has not yet run its course | 23:27 | |
but which I think is close to doing so. | 23:29 | |
So that if you look at our present | 23:33 | |
domestic economic problems, | 23:34 | |
the problems of inflation, | 23:36 | |
the problems of a shortage of productive capacity | 23:38 | |
and a misallocation of productive capacity, | 23:43 | |
these are all traceable directly back, in my opinion, | 23:46 | |
to that ill-fated action on August 15th, 1971, | 23:50 | |
in the domestic sphere. | 23:53 | |
Now, interestingly enough, in the international sphere | 23:55 | |
it was the other way around. | 23:57 | |
Until August 15th, 1971, | 24:01 | |
the Nixon administration had followed a policy | 24:04 | |
of controls in the international sphere. | 24:06 | |
As my subscribers know, I had all along been in favor, | 24:09 | |
I've for many, many years been in favor | 24:12 | |
of closing the gold window, | 24:14 | |
and indeed, I wrote a memorandum to Mr. Nixon | 24:15 | |
early in his administration, | 24:18 | |
or just before he was inaugurated, in fact, | 24:19 | |
urging that as a first act on becoming president | 24:22 | |
he should close the gold window | 24:25 | |
and lay the groundwork for a system | 24:27 | |
of floating exchange rates and repeal all exchange controls. | 24:29 | |
He took the first of those steps in August 15th, 1971, | 24:33 | |
and therefore, laid the base for a free market policy | 24:37 | |
in international financial arrangements. | 24:40 | |
It took some time for that to mature, | 24:42 | |
but by now, all exchange controls have been eliminated. | 24:45 | |
The interest equalization tax has been wiped out | 24:50 | |
and the restrictions of foreign lending | 24:54 | |
by banks hase been wiped out. | 24:55 | |
The restriction on foreign investment | 24:57 | |
by American corporations have been wiped out. | 24:58 | |
So, you have this interesting spectacle, | 25:01 | |
that before August 15th, 1971, | 25:04 | |
we had a free market policy at home | 25:06 | |
and a policy of controls abroad. | 25:08 | |
After August 15th, 1971, we had a policy of controls at home | 25:10 | |
and a free market abroad, | 25:14 | |
And of course, in both segments, | 25:16 | |
the area in which we had a free market policy was successful | 25:18 | |
and the area in which we did not was a great failure. | 25:21 | |
In the international sphere, | 25:25 | |
as I've pointed out here time and again, | 25:26 | |
we would've had many a... | 25:28 | |
We would have had an enormous international financial crisis | 25:30 | |
at the time of the Yom Kippur War | 25:33 | |
if it was not for the floating exchange rate system | 25:35 | |
which had been set in motion | 25:38 | |
by the closing of the gold window on August 15th, 1971. | 25:40 | |
So, in retrospect, | 25:45 | |
you have to give a very mixed appraisal of | 25:50 | |
the Nixon years. | 25:56 | |
I cannot really say the Nixon economic program | 25:58 | |
because the Federal Reserve Board, for example, | 26:00 | |
is independent of the president, | 26:04 | |
and our present inflation certainly owes a great deal | 26:05 | |
to their behavior. | 26:08 | |
- | So do price and wage controls. | 26:10 |
- | You are quite right, so do price and wage controls. | 26:12 |
It was Arthur Burns, by his advocacy | 26:15 | |
of voluntary price and wage controls | 26:18 | |
in early 19, in late 1970, early 1971, | 26:20 | |
who really made it respectable | 26:25 | |
for Republicans to be in favor of price and wage control | 26:27 | |
and who, in that way, certainly had a great deal to do | 26:30 | |
and must bear a large share of the responsibility | 26:33 | |
for the fact that Mr. Nixon imposed price and wage controls | 26:36 | |
in the summer of 1971. | 26:42 | |
I may say Mr. Burns was very strongly | 26:43 | |
and vigorously and publicly opposed | 26:46 | |
to the second freeze in 1973. | 26:48 | |
But I am sorry to say that from his present testimony | 26:52 | |
before the Joint Economic Committee, | 26:54 | |
that he seems once again to be backsliding. | 26:56 | |
But, at any rate, as I say, | 26:59 | |
if you look at the Nixon years | 27:02 | |
and don't try to say whether it's Mr. Nixon personally | 27:04 | |
who's responsible or what, | 27:07 | |
you have to give a very mixed assessment. | 27:08 | |
You have to give a good plus | 27:11 | |
for economic policy until 1971, | 27:15 | |
a good minus for international economic policy till then. | 27:19 | |
A good plus for (laughs) | 27:23 | |
economic policy internationally after that date | 27:25 | |
and a big minus for domestic policy. | 27:29 | |
Unfortunately, it was too bad | 27:31 | |
that we couldn't get it all together | 27:33 | |
and have the pluses come at the same time and continue. | 27:35 | |
That is, of course, what makes, | 27:40 | |
from another point of view, the situation so tragic. | 27:42 | |
What a magnificent opportunity we had, | 27:46 | |
and what a magnificent opportunity was thrown away. | 27:49 | |
The 1970 recession was mild. | 27:53 | |
It was not a major tremor. | 27:55 | |
But, in retrospect, it was a purely masochistic exercise. | 27:57 | |
We got nothing whatsoever out of it. | 28:02 | |
Let us hope that we don't go through that process again, | 28:07 | |
but unfortunately, I am not very confident | 28:10 | |
that we shall not. | 28:12 | |
- | I think we have time to answer one subscriber's question | 28:18 |
in our time today. | 28:22 | |
Mr. Windsor, Vice President of Parker/Hunter Incorporated | 28:24 | |
writes it would appear to me that in order to explain | 28:29 | |
the phenomenal increase in interest rates | 28:32 | |
during the past three and one half months, | 28:34 | |
one must first explain why commercial and industrial loans | 28:36 | |
increased so sharply in March and April. | 28:39 | |
Would you kindly comment on the following thesis? | 28:43 | |
The massive increase in industrial | 28:46 | |
and commercial loans in March and April | 28:48 | |
may be the result of inventory accumulation | 28:50 | |
precipitated by anticipated price increases | 28:52 | |
resulting from the dismantling of wage price controls | 28:55 | |
on April 15th, 1974. | 28:58 | |
And then Mr. Windsor gives the actual figures | 29:01 | |
showing the phenomenal increase | 29:04 | |
in industrial and commercial loans in March and April. | 29:06 | |
- | What has been... | 29:11 |
That's, of course, a very, very perceptive comment. | 29:12 | |
What has been most done, most prominent about this period | 29:18 | |
has been the extraordinary, phenomenal increase | 29:20 | |
in short-term interest rates. | 29:23 | |
The long-term rates have not risen anything like as much, | 29:26 | |
and you have the continuation of the situation | 29:28 | |
in which short-term interest rates | 29:32 | |
have been decidedly above long-term interest rates, | 29:33 | |
which historically has been a case in which | 29:36 | |
people have been expecting interest rates to fall. | 29:39 | |
I have no doubt | 29:43 | |
that Mr. Windsor, | 29:46 | |
the factor Mr. Windsor points to is an important one, | 29:47 | |
that the prospect of the end of wage and price controls | 29:51 | |
made it advantageous for people to accumulate inventories. | 29:55 | |
We had a, had this phenomenon on a massive scale | 29:58 | |
in the case of the meat business, | 30:01 | |
when we had a meat freeze in '73 | 30:03 | |
and we had the great accumulation | 30:04 | |
of meat inventories, of cattle, | 30:06 | |
but the expectations were sadly disappointed | 30:10 | |
and prices of meat fell sharp. | 30:13 | |
Now, in the present case, | 30:15 | |
the expectations have not yet been completely disappointed, | 30:17 | |
although there has been a good deal of weakness | 30:20 | |
in commodity prices. | 30:22 | |
They may be. | 30:23 | |
But it is certainly true that revised estimates | 30:24 | |
by the Department of Commerce have been revising upward | 30:28 | |
at a volume of physical inventory accumulation | 30:32 | |
during not only the months Mr. Windsor points to, | 30:36 | |
March and April, but throughout the first part of 1974. | 30:40 | |
And indeed if, I'm not certain about this | 30:44 | |
but I believe also in late '73. | 30:46 | |
The inventory accumulation at prices that are far higher | 30:50 | |
than they were a year ago | 30:55 | |
does introduce an increase in demand | 30:57 | |
for commercial and industrial loans | 30:59 | |
and may well explain part | 31:00 | |
of the rapid rise in interest rates. | 31:02 | |
But I wonder whether an even more important factor | 31:05 | |
may not be a point that has been widely noted in May, | 31:09 | |
that the rising prices of commodities | 31:14 | |
produced very rapid increase in inventory profits, | 31:18 | |
in recorded profits of enterprises | 31:23 | |
on a first in, first out basis, | 31:25 | |
inventory profits which provided no cash | 31:27 | |
because they had to be, | 31:31 | |
the replacement costs of the inventories | 31:33 | |
went up as the price did, | 31:35 | |
and therefore, this was fundamentally a book entry, | 31:37 | |
but yet, inventory profits which created tax, | 31:41 | |
federal tax liability | 31:43 | |
and which enterprises then had to finance | 31:45 | |
in one way or another. | 31:48 | |
And so I would... | 31:50 | |
I really haven't gone through the figures | 31:51 | |
on the flow of funds. | 31:53 | |
This is a question Mr. Windsor raises | 31:54 | |
is one which can be examined in a much more detailed | 31:57 | |
and satisfactory way than I am doing it on this offhand way, | 32:00 | |
but I would not be at all surprised | 32:03 | |
if the raise, if the borrowing of funds to meet the tax, | 32:05 | |
in a way, the artificial tax lie... | 32:12 | |
Let me put that, they were real tax liabilities. | 32:14 | |
The tax liabilities on artificial profits | 32:17 | |
was not a more important factor | 32:20 | |
in the short-term rise in commercial and industrial loans, | 32:23 | |
and, therefore, in the upward pressure | 32:27 | |
on short-term interest rates, | 32:29 | |
than was the accumulation of physical inventories | 32:31 | |
for the speculative purposes of profiting | 32:35 | |
from an anticipated rise in prices. | 32:39 | |
- | Thank you very much. | 32:42 |
Remember, subscribers, if you have any questions or comments | 32:43 | |
please send them to Instructional Dynamics Incorporated. | 32:46 | |
450 Ohio Street, Chicago, Illinois, 60611. | 32:50 | |
We shall be visiting with you again in two weeks. | 32:56 |
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