Tape 175 - Money, Federal Reserve Bank of San Francisco, Monetary Targets, Eurodollars / Paul A. Samuelson papers, 1933-2010 and undated / Duke Digital Repository

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Hello, this is Rose Friedman

0:02

inviting you to another of our biweekly conversations

0:04

with Milton Friedman, professor of economics

0:07

at the University of Chicago.

0:10

We are taping this interview early in September.

0:11

As usual, let's start with money.

0:20

Is there anything new in the monetary situation?

0:22

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No, nothing really new.

0:24

The latest monetary figures show

0:27

that there is a continuation, at least for the time being,

0:29

of the slower rate of monetary growth

0:33

that began at the end of June.

0:35

If you look at the narrow money supply, M-one,

0:38

the rate of growth in the past two months

0:41

has been at 2.6%, which is very low.

0:43

However, for longer periods, you still have

0:50

very high rates of course.

0:52

If you go back to the six months

0:54

from February to the latest figures,

0:56

the rate of growth is 8.6%.

0:59

For M-two, the past two months has shown only

1:02

an eight percent rate of growth.

1:07

Going back over six months, it's nearly 12%.

1:09

The question of course remains

1:14

whether this slower rate of growth

1:17

through the past two months

1:21

is a temporary aberration or will continue,

1:23

and for that, we will have to wait and see.

1:26

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I wonder if your subscribers wouldn't be interested

1:31

in the new publications coming from

1:34

the Federal Reserve Bank of San Francisco.

1:35

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There is a new spirit blowing in the economic publications

1:38

of the Federal Reserve Bank of San Francisco.

1:42

As all of my subscribers know,

1:45

the Federal Reserve Bank of St. Louis

1:49

has heretofore been the major fount

1:50

for monetary and economic data.

1:53

They have, without question,

1:56

been the most important single Federal Reserve bank

1:57

in the system out of the 12.

2:01

And anybody who wants to keep tabs

2:03

on current monetary and financial trends

2:06

will be well to benefit from the publications

2:08

which they put out, their weekly financial statistics,

2:12

their monthly monetary trends and economic trends.

2:14

Plus, their occasion of publication,

2:21

I guess it's quarterly, on rates of change

2:24

of various economic magnitudes in something like

2:28

10 or a dozen major nations of the world.

2:31

Now, it so happens that not long since,

2:36

one of the people who was at St. Louis, Michael Caron,

2:41

went to the Federal Reserve Bank of San Francisco

2:46

as a vice president in charge of research.

2:49

The result has been that San Francisco

2:51

has now shown a resurgence and a rather drastic change

2:54

in the kind of material they are putting out.

2:58

The latest of these was a spring 1975 issue

3:01

of their Business Review.

3:05

I might digress to note that the law which establishes

3:07

the Federal Reserve system requires

3:10

every one of the 12 Federal Reserve banks to issue,

3:12

I think, a monthly publication or a monthly review,

3:16

which it must make available to people

3:24

who request it without charge.

3:26

It's equally true of the other items that they produce

3:29

that you can get them without charge.

3:32

We're paying for them, of course, as a taxpayer,

3:33

and I object strenuously to this kind of a subsidy.

3:36

But as long as it's there,

3:39

we might as well take advantage of it.

3:40

At any rate, the Business Review

3:42

of the Federal Reserve Bank of San Francisco,

3:45

its number labeled spring 1975,

3:47

contains a coordinated series of articles on world inflation

3:51

which I think are extraordinarily good

3:55

and which I think everybody,

3:57

all of you would find interesting.

3:59

It starts with an article by Ed Shaw

4:01

on international money and international inflation

4:05

and continues with an article by Mike Caron

4:07

on the explanation of simultaneous inflation recession,

4:10

an article on central buying policy toward inflation

4:14

and on the interdependence on national policies.

4:17

But perhaps of even more immediate and continuing interest

4:21

is the fact that they have started to publish,

4:26

and the one I have here is dated May 1975,

4:28

a series of what they call

4:32

Pacific Basin Economic Indicators.

4:35

And these are very comparable to the series,

4:39

an international series that the Federal Reserve Bank

4:42

of St. Louis has been using,

4:44

except that they are for a different set of countries.

4:46

There is a little overlap.

4:49

Both of them include the United States and Japan,

4:51

but the San Francisco publication is for

4:58

the countries in what they call the Pacific Basin.

5:01

And the countries they cover are Australia, Canada, China,

5:04

Hong Kong, Indonesia, Japan, Korea, Malaysia, New Zealand,

5:07

Philippines, Singapore, Thailand, and the United States.

5:11

And for each of these countries, they give

5:14

a triangle, such as St. Louis has made familiar,

5:18

showing rates of change between

5:21

any pair of quarters you choose to compare

5:23

for money supply, international reserves, consumer prices,

5:27

wholesale prices, manufacturing, employment,

5:30

industrial production, nominal gross national product,

5:32

real gross national product, imports and exports.

5:37

Now, some of these series aren't available,

5:40

but most of them are available.

5:42

You can get copies of this

5:44

by writing to the Federal Reserve Bank of San Francisco,

5:45

and certainly anybody who is interested

5:48

in the course of economic events in the Pacific Basin

5:49

I think would find them a very useful supplement

5:52

to the Federal Reserve Bank of St. Louis publications.

5:55

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Some recent telephone calls you've been getting

6:00

from people who are interested in your thoughts about

6:02

targets for long-term monetary growth

6:05

make me think that there's some confusion about

6:08

just what your targets are.

6:11

I wonder if you wouldn't spell them out a little more.

6:12

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The confusion I think is on two different levels,

6:17

and I think it is well to spell them out.

6:20

One is short versus long-term targets.

6:22

The second is to what money supply the targets apply.

6:26

Now,

6:31

let me take the long-term monetary targets

6:35

which I have had now for many years.

6:37

These have been a rate of growth in money

6:40

of something like three to five percent,

6:47

roughly corresponding to the expected rate of growth

6:49

in total output.

6:52

Now the monetary aggregate

6:53

for which I have used those percentages

6:55

has always been M-two,

6:58

currency plus total commercial buying deposits

7:01

in recent years other than large CDs.

7:04

That is a long-range target.

7:11

Now what does that target for M,

7:14

because over the long range,

7:17

that would imply roughly zero price rise.

7:19

With respect to that monetary total,

7:23

velocity of circulation has been relatively constant

7:28

over recent years.

7:30

For earlier periods, the velocity was declining.

7:32

It may decline again in the future.

7:35

So that's why it's put as a range of three to five percent.

7:38

On the whole, the way that range was attained

7:43

was that real output growth over a hundred year period

7:44

has been something like three and a half percent.

7:47

The rate of velocity has declined

7:52

by about one percent a year

7:54

so that to keep stable prices would have required

7:56

over that period something like four and a half percent

7:59

per year increase in M-two.

8:01

That's why I have always put it as something like

8:04

three to five percent.

8:06

Now the question is what does that imply

8:08

for other monetary aggregates.

8:09

In the post-war period,

8:12

M-one has risen decidedly less rapidly than M-two,

8:14

indeed by something like three percent a year less rapidly.

8:18

The reason for that is very easy to find.

8:22

In the post-war period,

8:24

we have had a substantial rise in prices.

8:26

Inflation has, well, I'm not stating that correctly.

8:31

We have had a rise in the rate of inflation.

8:35

As the rate of inflation has risen,

8:38

interest rates have risen.

8:39

As interest rates have risen,

8:41

it has become more and more costly

8:44

to hold cash in the form of demand deposits.

8:45

This is because of Regulation Q.

8:49

Regulation Q is ordinarily understood as

8:51

setting maximum limits on the rates paid on time deposits,

8:54

but one provision of it provides for a zero rate of interest

8:58

on demand deposits, that is, a prohibition

9:01

of interest on demand deposits.

9:04

Consequently, as interest rates rise,

9:06

the indirect way by which banks are able to pay interest

9:09

on demand deposits become less efficient

9:12

and there's more and more pressure

9:14

to get out of demand deposits and into other things.

9:16

As a result, M-one has risen at about

9:18

three percent per year less than M-two.

9:21

Thus, if this were to continue,

9:24

corresponding to the rate of growth of M-two,

9:27

three to five percent would be

9:30

a zero to two percent rate of growth of M-one.

9:32

However, I believe it would be invalid

9:35

to make that judgment over a long period.

9:37

The reason is that if you really got M-two

9:41

down to three to five percent,

9:43

even with Regulation Q in effect,

9:45

the rate of inflation would taper off so sharply.

9:48

Interest rates would fall,

9:52

and there would no longer be such a great incentive

9:54

to economize in M-one.

9:56

As a result, I believe the rates of growth

9:58

of M-one and M-two would come closer together.

10:00

This question of which particular monetary total you take

10:03

is of very little importance

10:07

looked over any longer range period

10:09

and certainly if Regulation Q is eliminated.

10:11

The only period in which you have had

10:15

substantial differential movements

10:17

between different monetary concepts

10:19

is when Regulation Q has been significant

10:21

and has tended to bite.

10:24

As a consequence,

10:27

I believe that that argument over

10:31

which monetary total you use is largely a smoke screen

10:33

thrown up by the Federal Reserve people and other people

10:36

who are very unwilling to adopt

10:41

a specific monetary target.

10:43

Now the second problem is

10:46

the question of getting from where we are now

10:50

to where we want to go.

10:53

At the moment, rates of growth of M-one

10:55

have been over the past few years,

10:58

I'm sorry, of M-two, have been over the past few years

11:01

in the area of something like 10% or more.

11:04

To come from 10% down to three to five percent

11:09

is to require a very substantial change.

11:11

Rates of growth of M-one have been about

11:15

three percentage points less

11:18

or somewhere in the neighborhood of about seven percent.

11:20

And that has the recent targets announced by the Fed

11:23

of five to seven and a half percent imply,

11:27

have been for M-one, they named a larger target

11:31

of something like eight to 10 and a half percent for M-two.

11:34

Now those rates of growth,

11:39

if they were continued indefinitely,

11:40

imply something like a seven percent rate of inflation.

11:42

It happens to have been the case

11:46

that during this period when M-one has been rising

11:48

less rapidly than M-two,

11:51

the rate of rise in M-one has been roughly equal

11:53

to the rate of inflation.

11:55

Now I know some of you will immediately say,

11:57

well, that doesn't work for 1973 and '74.

11:59

After all, M-one never got up to ranges of 12 and 14%

12:02

and the rate of inflation did.

12:06

But that is, as I have stressed repeatedly,

12:08

is highly misleading.

12:10

You must take the whole period from 1971 to '74 or '75

12:12

as a whole

12:16

because in the early part of that period,

12:17

you had price and wage control,

12:19

which made the recorded rates of inflation

12:21

less than the true rates of inflation.

12:23

Once price control broke,

12:25

you had inflation rates breaking out into the open

12:27

and you had a jump to the double digit rates.

12:29

But that was mostly just a catching up

12:33

or a case in which the index has started to tell the truth.

12:35

If you take the average rate of inflation

12:40

over the three, three and a half years

12:42

from early 1971 to the end of '74,

12:44

you get a rate of inflation

12:48

of about seven and a half percent.

12:49

And if you look at the rate of growth of money

12:52

over that same period or better,

12:54

over a period earlier than that

12:57

since as I've emphasized,

12:59

there's something like a one to two year lag

13:00

between a rate of change in money

13:02

and a rate of change of inflation,

13:04

you will again get something a little lower,

13:06

maybe six and a half, seven percent,

13:08

maybe seven percent for the rate of growth of M-one

13:11

so that the rate of growth of M-one

13:14

is of the same order of magnitude as the rate of inflation.

13:15

Similarly, if you were to continue for the future

13:19

with a rate of growth of M-one

13:21

between five to seven and a half percent,

13:23

that would imply a rate of inflation of about seven percent.

13:25

And you can say therefore

13:29

that that long-range target would be very inflationary.

13:31

However, it is not a long-range target.

13:35

As I've stressed here, in his verbal statements,

13:39

Chairman Burns has always emphasized

13:43

that this is a short-range target

13:45

and that over the longer range,

13:48

in order to get inflation under control,

13:49

it is essential to have

13:51

a decidedly lower rate of monetary growth.

13:52

I agree strongly with that.

13:55

And the question is now,

13:57

how fast do you go from where you are now

13:59

to where you would like to go.

14:02

That's not a question that you can answer, I think,

14:03

with the same confidence as you can state

14:06

your long-range targets.

14:08

As long as our actual rates of monetary growth

14:09

were not far from the desirable long range rates,

14:12

I had been in favor of going there in one fell swoop

14:15

and getting it over and done with.

14:18

But it's not clear that that's desirable

14:21

once you get as far away as you are.

14:23

And you can make a fairly strong case

14:25

for going there gradually.

14:27

For example, a fairly sensible proposal

14:29

would be to say, well, let's accept

14:32

these short-range targets of eight to 10 and a half percent.

14:35

Let's say, nine, nine and a half percent

14:38

over the next year for M-two.

14:40

And then let's bring those down by something like

14:43

two percentage points a year

14:46

so that you get down, let's say,

14:49

within about three years

14:53

to that range of three to five percent

14:56

that I was talking about.

14:59

That would mean you would have steady pressure

15:00

to slow down the rate of price inflation,

15:02

but you would not require it to be done immediately.

15:05

You could take your time.

15:07

And therefore, you would suffer less

15:09

from any temporary unemployment

15:11

or any temporary difficulties.

15:13

That's what would be desirable.

15:16

I am very far, as you know indeed, from predicting

15:17

that that's what in fact you will have happen.

15:20

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A question you got recently from

15:26

Mr. Van Gorkom, president of Trans Union Corporation,

15:29

seems like an interesting one for you,

15:33

would be an interesting one for your subscribers.

15:35

He writes, a recent issue of Barron's

15:38

contained an interview with Jacques Rueff,

15:40

which raises again the general question

15:43

of the effect on our economy

15:45

of the increase in the Euro dollar market.

15:46

He states, quote, we will not get out, that's Rueff.

15:49

We will not get out of this recession

15:52

as long as we have an inconvertible dollar

15:55

because it increases the liquid dollar liabilities

15:57

held by foreigners and that stokes inflation,

16:00

which in turn pushes up interest rates

16:03

and that causes recession.

16:05

The crux of the question is

16:07

that monetary inconvertibility

16:09

increases international liquidities,

16:11

which provide inflation and then recession, end of quote.

16:13

Would you please comment on this statement

16:17

with particular attention to the oft-repeated question,

16:18

does a growth in the Euro dollar market

16:21

in any way affect the domestic economy supply,

16:23

domestic money supply of the United States?

16:26

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Let me go at that in two parts,

16:29

first talking about Jacques Rueff's statement

16:33

and then about Mr. Van Gorkom's question

16:35

on the Euro dollar market.

16:37

Jacques Rueff is an old friend of mine

16:39

and a very able man for whom I have a great deal of respect.

16:42

His analysis of the sources of our present problem

16:46

is, I believe, it's penetrating

16:49

and overlaps a great deal with my own.

16:53

But he and I part company very much

16:57

on the question of what ought to be done about it.

17:00

And this quotation brings out that difference.

17:03

Let me go at it rather backward.

17:10

What Mr. Rueff would like to say would be

17:13

a dollar convertible into gold at a new fixed price.

17:15

He would be in favor of a price

17:20

of something like $150 to $200 an ounce for gold,

17:23

and his proposal is that that price be reestablished,

17:27

that the US agree to convert the dollar into that price.

17:32

He recognizes that even if you

17:36

value US gold reserves at that price,

17:40

that would not be a large enough amount of gold

17:42

to enable dollar convertibility

17:45

we would maintain necessarily.

17:47

And so, he has proposed that various countries

17:49

lend to the United States their gold

17:51

revalued at this higher price.

17:54

Now, it's not an absurd approach.

17:57

On the contrary, if indeed

18:00

you could get a situation in which

18:02

the various countries of the world

18:05

would be willing to accept the discipline

18:06

of a real gold standard of real convertibility and the rest,

18:08

it might be a cheap price to pay.

18:11

But I think it is an utterly unrealistic

18:14

and therefore undesirable approach

18:16

because I believe that under present political circumstances

18:19

there is no country, no major country in the world

18:23

that would be willing to submit itself

18:26

to the discipline of the gold standard in that sense.

18:28

I cannot conceive, for example,

18:30

that the United States would be willing to go through

18:32

a long, painful recession or depression,

18:35

merely in order to be sure,

18:37

to be able to maintain the ability

18:39

to pay out dollars for gold at whatever artificial

18:41

or arbitrary price you want.

18:45

I believe that the inflation has much deeper roots,

18:48

which are fundamentally in the expanded role of government

18:51

and in the expanded size of government

18:57

as a fraction of the national income,

18:58

on the increased difficulty of financing

19:01

such governmental expenditures

19:03

by taxes voluntarily borne by the public

19:05

and hence on the pressure to rely increasingly

19:09

on inflation as a method of taxation.

19:11

Now, from Mr. Rueff's point of view, he says

19:16

that an inconvertible dollar increases

19:20

the liquid dollar liabilities held by foreigners.

19:24

Now that's a curious statement

19:29

because I would have argued earlier

19:31

that the relationship was the other way,

19:36

that when we have a convertible dollar,

19:38

not convertible into gold particularly

19:40

but with fixed exchange rates between currencies,

19:42

when, for example, Germany was committed to maintaining

19:46

the market at a par with the dollar,

19:49

then under those circumstances,

19:54

German dollar liabilities increased

19:56

because Germany had to accept,

19:59

had to accept dollars in return for marks.

20:03

But Mr. Rueff argues the other way.

20:09

He argues that,

20:12

I guess he would answer to that,

20:15

well that's true if you have a fixed exchange rate

20:17

in terms of dollars.

20:21

But if you had had gold,

20:22

the Germans instead of taking dollars

20:24

could have turned the dollars in for gold,

20:26

and that would have forced such pressure on the US

20:28

to contract and it could have continued to inflate,

20:31

and under those assumptions, he would be right.

20:33

But what is the situation with an inconvertible dollar

20:37

in both senses,

20:39

with a situation in which you have essentially

20:40

floating exchange rates?

20:42

The situation is that

20:44

nobody has to hold any liquid dollar liabilities

20:46

unless he wishes to do so.

20:48

The complaint which comes over and over again from France,

20:51

where Mr. Rueff is very influential,

20:55

is a complaint not against flexible exchange rates

20:58

but against the laws of arithmetic.

21:01

The objection which the French make

21:04

is that they would on the one hand

21:06

like to sell more than they buy,

21:08

they would like to have a balance of payment surplus,

21:10

they are very anxious to export relative to their imports.

21:13

On the other hand, they don't want to accumulate

21:16

foreign exchange.

21:18

Well, that's a neat trick if you can do it, but you can't.

21:20

Under any kind of a system,

21:23

total outflows have to balance total inflows.

21:25

You have double entry bookkeeping.

21:28

And if the French are going to sell more than they buy,

21:30

then they have to be prepared in some way or another

21:33

to lend the people who buy from them

21:36

more than they sell to them.

21:39

That is to say, they either have to accumulate

21:41

dollar liabilities or pound liabilities or mark liabilities

21:44

in the form of notes or promises to pay

21:48

or trade bills or whatnot,

21:54

or they have to be willing to accumulate the difference

21:56

in the form of the currencies of the US

22:00

or of the Germans or whatnot.

22:03

Now of course, I should hasten to add

22:07

I am being somewhat hypothetical along Rueff's line

22:10

because in fact, France is one of the countries

22:14

that has been inflating rather more than others.

22:17

It has a very high rate of inflation

22:19

from its internal policy.

22:22

But let's go back to Mr. Rueff's case.

22:24

Under inconvertible dollars in the two senses

22:27

of flexible exchange rates and no convertibility into gold,

22:30

nobody has to add to his dollar balances

22:32

unless he wishes to.

22:37

Now it is true

22:38

that many foreigners hold dollar balances,

22:40

either in the form of Euro dollar deposit,

22:43

of deposits at Euro dollar banks,

22:46

or in the form of deposits in the United States

22:49

or in the form of strict US currency

22:54

or in other forms.

22:58

But they hold that because they believe

23:00

that that is a better way in which to keep their assets

23:02

than any other.

23:05

This does not stoke inflation.

23:08

What stokes inflation is the expansion

23:11

in the quantity of money in each country separately.

23:14

What stokes inflation in France

23:17

is that the French print or create too many francs.

23:19

Now it is true

23:24

that the availability of dollars to be held

23:25

makes a given rate of expansion of the French money

23:29

more inflationary than it otherwise would be

23:33

because it gives people a way to hold assets

23:35

which lessens the demand for francs.

23:39

To put it another way, it makes the printing of francs

23:42

a less efficient tax because there's a smaller tax base

23:46

because people can substitute the holding of dollars

23:50

for the holding of francs.

23:52

But that's the only sense in which it stokes inflation.

23:54

There is no, I cannot agree with Mr. Rueff's statement

23:58

that monetary inconvertibility

24:02

increases international liquidities,

24:05

which provide inflation and then recession.

24:07

On the contrary,

24:09

one of the great arguments that has been made

24:10

against in the past floating exchange rates

24:12

is that it would make it difficult for people

24:15

to have adequate liquidity in the international area

24:17

because there would be no assurance

24:20

about the convertibility of one form of currency

24:24

into another.

24:27

Now let me turn to Mr. Van Gorkom's own question

24:29

about whether a growth in the Euro dollar market

24:32

in any way affects the domestic money supply

24:34

of the United States,

24:36

which is not strictly related to Rueff's point

24:40

but is indirectly related.

24:43

Here, the question is partly one of definition.

24:46

As we now define

24:50

the domestic money supply of the United States,

24:52

the domestic money supply of the United States includes

24:54

deposits at US banks by foreign banks.

25:01

Those foreign banks,

25:07

some of them are in the Euro dollar business and in part,

25:08

they hold dollar balances at US banks on that account

25:12

as reserves, so to speak, for their Euro dollar liabilities.

25:17

Now, to that extent, a growth in the Euro dollar market

25:22

does not affect the domestic money supply

25:28

of the United States as so defined,

25:30

but may mean that a larger fraction of it

25:32

is held by foreign banks rather than by domestic banks.

25:35

The total domestic money supply of the United States

25:39

is fundamentally determined

25:41

by the volume of high-powered money

25:43

which the Federal Reserve makes available.

25:45

Given any volume of high-powered money,

25:50

there will be a given total domestic money supply.

25:53

Now again, in a full analysis,

25:56

I would have to qualify that a little

25:58

because the total money supply that can be supported by

26:00

a given volume of high-powered money,

26:03

that is currency plus bank balances at Federal Reserve banks

26:05

money that the Federal Reserve creates,

26:10

the total money supply that can be

26:12

supported by a given amount of high-powered money

26:14

depends somewhat on just how

26:16

that money supply is distributed

26:18

because of different Reserve requirements for New York banks

26:20

and for country banks and the like.

26:22

But that's a matter of very secondary importance.

26:24

So to go back, for a given high-powered money supply,

26:27

there will be a given domestic money supply

26:31

in the United States.

26:34

The fraction of that,

26:35

which at present is held by foreign banks,

26:36

may be affected by the growth of the Euro dollar market.

26:39

But that is a very trivial and minor effect.

26:42

Now I believe, with respect to the Euro dollar market,

26:45

there are two other issues which are more significant.

26:48

Issue number one, which has

26:51

caused a good deal of uncertainty among people,

26:54

are Euro dollars created dollars

26:58

or are they dollars transferred out of the money stock?

27:00

The answer is they are almost to the whole created dollars.

27:03

The existence of the Euro dollar market

27:06

for a given US domestic high-powered money and money supply

27:09

makes total world money larger than it otherwise would be.

27:13

That I think there is no doubt about

27:19

and almost everybody by now has come to agree with that.

27:21

Second question.

27:24

Does an expansion in the Euro dollar market

27:25

for a given high-powered money in the United States

27:29

add to the inflationary pressure in the United States?

27:33

The answer is yes but to a very small extent.

27:35

Why?

27:39

Because a large fraction of Euro dollars

27:40

are held by people instead of holding francs,

27:42

instead of holding pounds, instead of holding marks.

27:45

To that extent, it adds to the pressure on the world

27:49

rate of inflation, on the world price level.

27:52

But only that part which is held

27:56

as an alternative to holding US dollars

27:58

affects the US inflation rate,

28:02

and that I think is empirically a very small magnitude

28:04

if you look at the figures.

28:07

You have to compare the Euro dollar holdings.

28:08

First of all, you have to eliminate Euro bank balances.

28:11

Second, you must compare them with a broad measure

28:13

of the money supply like M-two or a still broader aggregate.

28:16

And empirical work which has been done

28:19

suggests that the effect is empirically very small.

28:22

Now another question,

28:26

a very different question that is asked,

28:27

does the existence of the Euro dollar market

28:30

affect the ability of the Federal Reserve

28:32

to control the money supply?

28:34

The answer to that is no.

28:36

It may affect what money supply they choose to control.

28:38

The Federal Reserve can take M-one, for example,

28:42

as presently defined as a subjective.

28:46

It can control that.

28:48

Given that it controls that,

28:49

it cannot also simultaneously control M-two, M-three,

28:51

or any of those plus the Euro dollar total.

28:54

If the Federal Reserve decided

28:58

that it wanted to control a total,

29:00

including the Euro dollar liability, it could do so,

29:02

provided it had the figures available

29:06

on Euro dollar liability.

29:09

But in doing so, it would sacrifice its ability to control

29:11

M-one or M-two.

29:14

I think these two separate issues have been confused.

29:16

One, what total is it sensible

29:19

for the Federal Reserve to try to control?

29:22

And second, does it have the ability

29:24

to control that total?

29:26

I think the answer to the second is

29:28

that the Euro dollar market in no way whatsoever

29:30

reduces the ability of the Federal Reserve

29:32

to control whatever total it chooses to control,

29:34

though it may conceivably, though not in my opinion,

29:37

change the total it's desirable

29:41

for the Federal Reserve to control.

29:44

I continue to be unrepentant in believing

29:46

that the total that is desirable to control is M-two,

29:48

though I must say I would be in favor of

29:52

modifying that total by eliminating the deposits

29:56

of foreign banks in the United States.

29:58

But aside from that minor change,

30:00

I think it's desirable for them to control M-two,

30:01

and I think we ought to stop paying so much,

30:04

worrying so much about Euro dollars.

30:06

They are a smoke screen, not a real problem.

30:09

-

I'm afraid we've come to the end of our time.

30:12

Thank you very much.

30:14

Remember subscribers, if you have any questions or comments,

30:15

please send them to Instructional Dynamics Incorporation,

30:18

Incorporated, 450 East Ohio Street,

30:22

Chicago, Illinois, 60611.

30:25

We will be visiting with you again in two weeks.

30:29

Tape 175 - Money, Federal Reserve Bank of San Francisco, Monetary Targets, Eurodollars

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