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Rose | Hello, this is Rose Friedman inviting | 0:02 |
you on behalf of Instructional Dynamics, | 0:04 | |
to another of our biweekly interviews with | 0:07 | |
Dr. Milton Friedman Professor of Economics | 0:09 | |
at the University of Chicago. | 0:12 | |
We are taping this interview on Friday, Nov 20th, | 0:14 | |
1971. | 0:18 | |
Why don't we start with any monetary developments, | 0:21 | |
has there been any change? | 0:25 | |
That's work commenting on? | 0:27 | |
Dr. Milton | Well that's an easy good one | 0:29 |
to start with because so far as I can see | 0:30 | |
there has been very little change. | 0:32 | |
The various monetary aggregates have continued | 0:35 | |
in their essentially | 0:39 | |
low rate of growth, | 0:42 | |
or negative rate of growth, since my last tape. | 0:44 | |
The latest figures, again show, | 0:48 | |
that the quantity of money defined narrowly, | 0:50 | |
that would of been declining on the average, | 0:52 | |
over the past several months. | 0:54 | |
The only new thing that might be worth recording | 0:57 | |
in the monetary development, is not a fact but statement. | 0:59 | |
A week or so ago, | 1:03 | |
Mr. Arthur Burns the chairman of the board, | 1:05 | |
appeared in | 1:09 | |
New York, | 1:10 | |
at a meeting, | 1:12 | |
at the New York Stock Exchange, | 1:14 | |
with some of the leading members of the security firms. | 1:16 | |
Now I have seen a copy of his statement, | 1:21 | |
but also I happen to be in New York shortly there after, | 1:23 | |
and talked with one of the people | 1:26 | |
who had been at the session and these statements agreed | 1:27 | |
that first, Mr. Burns went to great lengths | 1:30 | |
to try to reassure those among his audience, | 1:34 | |
who were concerned about the declining, | 1:37 | |
about the slow rate of growth | 1:40 | |
or the decline in the quantity of money, | 1:42 | |
he stressed that this was to be regarded as | 1:44 | |
a temporary departure from a moderate, | 1:46 | |
from a path of moderate rate of growth | 1:50 | |
in the quantity of money, | 1:52 | |
and indicated that he expected | 1:54 | |
the moderate rate of growth to be resumed shortly. | 1:56 | |
He was also at considerable pains | 2:00 | |
to try to | 2:03 | |
quiet | 2:05 | |
the apprehensions of those people | 2:06 | |
who were concerned that you might see another | 2:09 | |
monetary explosion, on the opposite end, | 2:11 | |
such as you saw in the first seven months of this year. | 2:14 | |
Here again, he repeated the statement he has made | 2:17 | |
many times to congressional committees and others, | 2:20 | |
that the fed will not be the architect of a new inflation. | 2:23 | |
So, there is no doubt that his announced intention | 2:27 | |
and expectation, is to have a fairly moderate rate of | 2:31 | |
growth in the quantity of money over the coming months. | 2:34 | |
Then he regards the recent slow rate of growth, | 2:37 | |
or negative rate of growth, | 2:41 | |
as a correction of earlier excesses, | 2:42 | |
the excesses that he admitted In his testimony, | 2:44 | |
before the joined economic committee in Chennai | 2:47 | |
was a mistake, and that therefore | 2:50 | |
what he is apparently aiming for is something like | 2:52 | |
an average rate of growth in the | 2:55 | |
neighborhood of five or six percent. | 2:57 | |
The question remains of course, whether he will achieve it. | 2:59 | |
The actual performance, the actual behavior | 3:02 | |
of the quantity of money or other monetary aggregates | 3:05 | |
over the past | 3:07 | |
nine months, | 3:10 | |
nine, ten months, | 3:11 | |
have not been what he in advance, at that time said, | 3:13 | |
and therefore we have to | 3:16 | |
be concerned | 3:20 | |
whether his future performance, | 3:21 | |
and the future performance of the system will be closer | 3:23 | |
to their announced statements in their past performance. | 3:25 | |
I find this one a very hard one to answer, | 3:29 | |
as I've stated in pervious tapes, | 3:33 | |
my conjectures, | 3:38 | |
my feelings are rather pessimistic. | 3:40 | |
I believe that when and as the | 3:43 | |
downward tendency-- | 3:48 | |
the recent softness in interest rates is reversed, | 3:49 | |
the fed will be in an extremely difficult position, | 3:53 | |
having accepted the logic of | 3:57 | |
setting controls on the prices, | 3:59 | |
on wages, | 4:02 | |
there is no stopping point in principle. | 4:04 | |
If it is appropriate to control those, | 4:07 | |
it is equally appropriate to control the interest rate. | 4:09 | |
If it is appropriate to control the short-- | 4:13 | |
interest rate, | 4:16 | |
the fed is in a box. | 4:19 | |
It's possible, as I've stressed before, | 4:21 | |
to hold down prime rates, consumer credit rates, | 4:24 | |
and other administered rates, | 4:27 | |
but how do you keep the treasury bill rate from going up? | 4:29 | |
That's going to be the hard nut for the fed to crack. | 4:32 | |
I hope Mr. Burns is able to carry through | 4:36 | |
on his determination of turning the money supply around, | 4:38 | |
getting it growing, | 4:41 | |
and also preventing it from going to rapidly, | 4:42 | |
but I remain skeptical, that he will in fact | 4:44 | |
achieve that over the next year. | 4:47 | |
Rose | How do you interpret the recent actions | 4:50 |
of the pay board and the price board? | 4:53 | |
Dr. Milton | Well there certainly has been | 4:55 |
a lot of noise in the newspaper, | 4:56 | |
and a lot of fuss and furry over, over those two, | 4:58 | |
particularly of course over the pay board, | 5:02 | |
with the much dramatized elegit dispute, | 5:05 | |
between the labor members on the one hand, | 5:09 | |
and the employer and the public members on the other. | 5:11 | |
On the whole, this seems to me to be | 5:16 | |
much a do about nothing, a lot of noise, | 5:18 | |
a lot of sound, and furry, but not much behind it. | 5:20 | |
The newspapers reported, a ten to five vote on | 5:24 | |
the part of the employer plus the public members | 5:27 | |
against the labor members, | 5:29 | |
to permit no retroactive pay increases. | 5:31 | |
This got a great deal of attention, | 5:35 | |
the labor members were going around indicating how | 5:38 | |
dissatisfied they were with what was going on, | 5:42 | |
muttering about withdrawing in the (mumbles). | 5:46 | |
I believe that was all play acting. | 5:48 | |
The fact of the matter is if you look further down | 5:51 | |
in the story, look to paragraphs 13 | 5:53 | |
instead of at the headlines, | 5:56 | |
what the pay board actually agreed to, | 5:58 | |
was that they would not, as a general rule, | 6:01 | |
permit retroactive pay increases, | 6:03 | |
except | 6:06 | |
in cases | 6:08 | |
A, B, C, and D, | 6:08 | |
and in my judgment the exceptions, account for the great | 6:10 | |
bulk of all cases that will come before them. | 6:13 | |
So that if you were to state directly what they did, | 6:16 | |
they agreed that they would approve the great bulk | 6:21 | |
of all retroactive pay increases. | 6:23 | |
I believe what happened is that | 6:25 | |
the trade union representatives got exactly what | 6:27 | |
they wanted, that you had something of a deal as it were, | 6:29 | |
between the trade union representatives and the others, | 6:32 | |
were by the trade union representatives would get | 6:36 | |
the substance but not the form of what they wanted, | 6:39 | |
and on the other hand, | 6:42 | |
they would have the | 6:44 | |
advantage | 6:46 | |
of appearing to have been over ruled | 6:47 | |
and be on the outs with the others. | 6:50 | |
I think that is clearly confirmed by the meetings of the | 6:53 | |
AFL-CIO down in Miami, | 6:58 | |
at which there was a lot of noise and talk | 7:00 | |
about opposition to the pay board, | 7:03 | |
rulings about refusal to cooperate with it, and so on, | 7:07 | |
and yet, there was no sign whatsoever, | 7:10 | |
of any intention by the trade union officials | 7:13 | |
to walk off the board. | 7:17 | |
I doubt very much that they will do so. | 7:19 | |
They will not do so, both because they are in effect | 7:22 | |
exerting far greater influence by being on the board | 7:25 | |
than they believe they would by being out, | 7:27 | |
off the board, | 7:30 | |
second because they are in essence getting what the want, | 7:31 | |
and third | 7:35 | |
because | 7:36 | |
they will feel, | 7:39 | |
it seems to me, that it will be politically advantageous | 7:40 | |
for them, for Mr. Nixon, | 7:44 | |
if they were to walk-out off of a pay board. | 7:46 | |
Mr. Nixon could then run his 1972 campaign, | 7:48 | |
as a campaign against | 7:54 | |
the lack of social responsibility and patriotism | 7:57 | |
of the trade unions. | 8:01 | |
He, after all, doesn't have very many votes to get him | 8:03 | |
on trade union officials, and he might get considerable | 8:06 | |
number of votes, even among the members of the trade unions, | 8:10 | |
by attacking the trade union officials. | 8:13 | |
So I believe that Mr. Meanie and his fellows will believe | 8:15 | |
that is it from their point of view | 8:18 | |
politically undesirable to walk-off. | 8:20 | |
Consequently, I think what we will see | 8:22 | |
on the pay board is it continues. | 8:24 | |
Spade of headlines and talks about disputes | 8:26 | |
between the various groups, but not really very much action. | 8:29 | |
Again, that's further confirmed a little bit, | 8:33 | |
by what appears to have been the decision to approve | 8:36 | |
the coal contract, | 8:43 | |
with it's first year of rise, | 8:45 | |
very, very much higher than the 5.5% that the pay board | 8:47 | |
said was going to be as a guideline. | 8:51 | |
It's an exception, it's a special case, | 8:52 | |
it's a problem of putting it in line, | 8:54 | |
you can always find excuses. | 8:56 | |
So I continue to believe that in the main, | 8:58 | |
what the pay board will do over this coming year, | 9:01 | |
is largely to approve the increases and arrangements | 9:03 | |
that would of occurred anyway. | 9:07 | |
Now when we come to the price board, | 9:09 | |
there you certainly have an extraordinary confused set | 9:12 | |
of statements about how you're going to determine prices. | 9:16 | |
In the first place, there rules say that--, | 9:21 | |
the same thing over twice in two different forms. | 9:25 | |
They say on the one hand, that | 9:28 | |
no price increases will be granted, | 9:32 | |
that increase profit margins. | 9:36 | |
Therefore the profit margins, per unit, | 9:38 | |
per unit margin on an item sold has to be held constant. | 9:41 | |
Second they say, that costs may be passed through | 9:46 | |
after allowances made for increases in labor productivity. | 9:49 | |
That is to say, | 9:53 | |
that if costs per hour of a concern goes up by 10%, | 9:55 | |
they will not regard that as justifying | 9:59 | |
a 10% wage increase, a price increase, | 10:01 | |
unless allowances first made for | 10:05 | |
improvements in productivity. | 10:07 | |
But that comes down over again to saying | 10:09 | |
that the margin is going to be kept constant, | 10:12 | |
because essentially what that means is that they will | 10:14 | |
approve a price increase, | 10:18 | |
equal to the increase in cost | 10:21 | |
not per hour, but per unit of output, | 10:24 | |
but the difference between the | 10:28 | |
increase in cost per unit of output, | 10:30 | |
and the increase in cost per hour, | 10:32 | |
is precisely the gain in productivity. | 10:34 | |
That is to say if wages go up 10%, | 10:36 | |
and the cost per unit go up 5%, | 10:39 | |
then there has been a 5% increase in productivity. | 10:42 | |
But, going back to my earlier point, | 10:45 | |
if cost per unit goes up 5% and prices go up 5%, | 10:48 | |
that means that the margin has stayed constant. | 10:53 | |
Thus, the rule of constant margins, | 10:57 | |
and the rule for allowing for productivity changes, | 10:59 | |
are so far as I can see, identically the same thing | 11:01 | |
stated in two different forms, | 11:04 | |
but in a way which is calculated | 11:06 | |
to promote a maximum of confusion. | 11:07 | |
It's very hard to make any sense out of this, | 11:12 | |
except in one way, and that is that the price board is | 11:14 | |
fully aware that one of the dangers | 11:18 | |
is wide spread vigilante action by consumer groups | 11:22 | |
that will harass and pester | 11:26 | |
every retailer, every seller. | 11:28 | |
Now, if they announced that no price, | 11:32 | |
no price could go up by more than 2.5%, | 11:35 | |
it would be very simple and easy for these vigilante groups | 11:38 | |
to determine whether a particular price was--, | 11:41 | |
rule was being violated. | 11:44 | |
On the other hand, if they have this complicated | 11:46 | |
sophisticated formula, which may permit anything, | 11:48 | |
then it's going to be very hard for anybody to tell, | 11:51 | |
including the retailer himself, | 11:54 | |
to tell whether or not he is in violation. | 11:56 | |
This point comes out in a slightly different way | 12:01 | |
that may be, may bring it out, here's American Motors. | 12:03 | |
They requested a set of price increases, | 12:08 | |
which by some magic action and came out to just 2.5%. | 12:11 | |
Their request has been approved by the pay board, | 12:18 | |
and they give the pay board a pat on the back--. | 12:20 | |
I'm sorry, the price board. | 12:23 | |
I give the price board a pat on the back for acting so | 12:24 | |
quickly, because in this way it is reducing the adverse | 12:28 | |
affect is has business activity | 12:31 | |
by providing quick decisions. | 12:33 | |
But now, what does that decision mean? | 12:37 | |
Number one, | 12:40 | |
it does not mean that American Motors | 12:41 | |
has permission to raise | 12:45 | |
the price on every individual car, by 2.5% and no more. | 12:48 | |
Not at all. | 12:52 | |
So far as this permission is concerned, | 12:54 | |
it may raise the prices on some cars by 10%, | 12:56 | |
and lower the prices on other cars, | 12:59 | |
so long as some kind of an average, | 13:02 | |
and I am not absolutely certain what kind of an average, | 13:05 | |
but presumably it's a base weighted average, | 13:07 | |
some kind of an average price increase works out to 2.5%, | 13:10 | |
that is provided, that all the cars they sell | 13:14 | |
bring in 2.5% more revenue than those--, | 13:18 | |
that same mixture of cars would of | 13:22 | |
brought in at the former prices. | 13:24 | |
That's very different from 2.5% on each particular item, | 13:26 | |
and it's obviously something that, | 13:31 | |
it is almost impossible to check on, | 13:33 | |
by an individual purchaser, or by an individual dealer. | 13:35 | |
Indeed it's not fair that you can know, | 13:40 | |
that you can know that that's going to be the case, | 13:43 | |
ever until six months afterwards, | 13:46 | |
because supposed they raise the price very--, | 13:49 | |
more on some cars and less on others, | 13:52 | |
then what the average is | 13:54 | |
depends on the volumes of sales of the two groups of cars, | 13:56 | |
and if the higher price | 13:59 | |
doesn't cut down sales of that item as much as expected, | 14:02 | |
it may be, that what you think of in advance, | 14:06 | |
will not happen. | 14:10 | |
That is one dimension of it. | 14:13 | |
The fact that you do not have, | 14:15 | |
a rise in the price, | 14:18 | |
of every individual item. | 14:19 | |
Another dimension of it is, | 14:22 | |
that this is only permission for American Motors | 14:23 | |
to raise it by as much as an average of 2.5%, | 14:26 | |
it doesn't follow that that permission will be used. | 14:29 | |
American Motors will undoubtedly | 14:32 | |
wait to see what Chrysler proposes, | 14:34 | |
and then also what General Motors proposes, | 14:37 | |
because it must obviously watch competition, | 14:41 | |
as well as what is has been permitted. | 14:44 | |
Chrysler has apparently permitted a request for-- | 14:47 | |
in price increases, and the gossip is that | 14:51 | |
this request is for a much higher average rate | 14:54 | |
of pricing increase than American Motors. | 14:57 | |
If so, I wouldn't be surprised at all | 14:59 | |
if the price board would get some headline millage, | 15:02 | |
by cutting it back. | 15:06 | |
They will want it, obviously, and here-- | 15:07 | |
the same thing will come to the pay board. | 15:10 | |
They all will want headlines | 15:13 | |
suggesting that they are being tough. | 15:14 | |
While in fact, they all recognize | 15:16 | |
that they will do the least harm to the economy, | 15:19 | |
if instead of being tough they more or less | 15:22 | |
let prices and wages change as they otherwise would. | 15:24 | |
We will see more of all of this | 15:30 | |
noise and confusion over the next few months. | 15:32 | |
The interesting question will be | 15:35 | |
not so much what they actually do to the prices, | 15:36 | |
because as I have stressed in these comments | 15:39 | |
that's going to be difficult to know | 15:43 | |
and probably will be less than it seems. | 15:44 | |
The interesting question will be | 15:47 | |
how rapidly the uncertainty, | 15:49 | |
which now exists among the business community with respect | 15:51 | |
to the decisions | 15:55 | |
of the price and the pay board will be resolved, | 15:56 | |
and whether when and as it is resolved | 15:59 | |
we see a resumption of a rapid | 16:02 | |
rate of growth of business spending, that's what I think, | 16:04 | |
the near term course of business depends on. | 16:08 | |
I might note, before I-- although this has nothing | 16:11 | |
to do with the price and pay board, | 16:14 | |
that a second revision of the | 16:16 | |
third quarter GMP figures has come out, | 16:18 | |
and this revision once again happened in the second quarter, | 16:22 | |
has substantially raised the estimated rate of growth, | 16:26 | |
of real output. | 16:31 | |
The original report, the original estimate, | 16:33 | |
had real output in the third quarter growing at 2.9%, | 16:36 | |
the revised version has real output growing at 3.9%. | 16:40 | |
That's still considerably below the final revision | 16:45 | |
of the second quarter estimate, | 16:50 | |
which was 4.8 or 4.9% if I remember rightly, | 16:51 | |
but it's not so much below the intermediate revision. | 16:56 | |
So as yet, the best thing you can say | 17:00 | |
about the third quarter is that the preliminary indications | 17:03 | |
continue to show a slower rate of growth | 17:06 | |
than you had in the second quarter, | 17:08 | |
but the figures still are fairly uncertain. | 17:09 | |
Rose | Since we will have a backlog of questions, | 17:13 |
lets take this opportunity | 17:16 | |
to try and clean up a few of them. | 17:17 | |
One recent question that just came in, | 17:21 | |
asks you to comment on our refute, the article called | 17:26 | |
Freidman and the Flat Tire, | 17:29 | |
in the March to April issue of the Financial Analysts | 17:31 | |
Journal of this year, by Alf Marshall. | 17:35 | |
Dr. Milton | I would be glad to, if I had seen it, | 17:39 |
but I haven't seen the article, | 17:41 | |
and I though Alfred Marshall was dead, | 17:42 | |
roughly 40 years. | 17:46 | |
I would say regard nothing of a greater honor than | 17:48 | |
having the Alfred Marshall write an article about my work. | 17:50 | |
I reply to this simply to mention that I haven't seen it, | 17:55 | |
but the letter came in too late for me to get to the library | 17:59 | |
to look it up, but I will as soon as I can look it up, | 18:01 | |
and then I will reply. | 18:03 | |
Rose | Another letter that has just come in, starts, | 18:06 |
I remember your initial enthusiasm for the appointment of | 18:09 | |
Arthur Burns, and share your disappointment in the apparent | 18:12 | |
modification of his economic philosophy. | 18:15 | |
I have heard Dr. Burns quoted as saying that he has, | 18:18 | |
"less of a monetarist" now then when he took office, | 18:24 | |
and wonder whether you have any knowledge | 18:28 | |
of the influences which have changed him. | 18:30 | |
From your vantage point, can you comment on the influences, | 18:34 | |
which seem to be changing him. | 18:37 | |
Dr. Milton | No doubt, the major influence | 18:39 |
which has affected Arthur Burns, | 18:42 | |
has been, | 18:45 | |
being in the position of having to act, | 18:47 | |
being chairman of the federal reserve. | 18:50 | |
As I mentioned earlier, in respect to the comments | 18:54 | |
which he made to the securities people, | 18:57 | |
he clearly continues to place great emphasis | 19:01 | |
on the behavior of monetary aggregates. | 19:04 | |
This has show up in a number of his comments | 19:07 | |
and the statements I've quoted before, | 19:09 | |
from his testimony in July | 19:11 | |
before the joined economic committee, | 19:14 | |
when he traced the behavior of the monetary aggregates | 19:16 | |
and expressed the view, that the fed had made a mistake | 19:19 | |
in permitting a very rapid rate of growth during | 19:24 | |
the first six or seven months of this year, | 19:28 | |
in the vain hope of holding down interest rates. | 19:30 | |
Yet, there is no doubt | 19:35 | |
that many of the views which he has expressed, | 19:39 | |
since he came into office as chairman of the fed, | 19:43 | |
are rather different from views which he expressed before. | 19:48 | |
The most dramatic change of course, | 19:51 | |
has been in his attitudes towards | 19:53 | |
incomes policy price and wage control. | 19:55 | |
There has been no more effective | 19:59 | |
invigorous critic | 20:01 | |
of prices and wage control or of incomes policy, | 20:04 | |
than Arthur Burns before he became chairman of the fed. | 20:08 | |
He criticized during the late 60's, | 20:13 | |
very vigorously the guidelines policy | 20:15 | |
of the Johnson administration, wrote some articles, | 20:17 | |
which are extraordinarily perceptive and | 20:20 | |
effective | 20:24 | |
in portraying the evil and difficulties of the policy. | 20:25 | |
Yet, ever since, oh well over a year ago, | 20:30 | |
a year and a half a go he has been publicly advocating | 20:34 | |
the adoptions of incomes policy, | 20:37 | |
including some kind of governmental intervention | 20:40 | |
into wages and prices. | 20:45 | |
Why the shift? | 20:48 | |
As I have stressed on these tapes before, | 20:51 | |
the rational explanation of the shift | 20:53 | |
is the distinction between incomes policy | 20:55 | |
and when basic forces our inflationary, | 20:58 | |
an incomes policy which is intended | 21:00 | |
to produce a transition from a high level of inflation | 21:02 | |
to a lower level of inflation. | 21:06 | |
But besides these analytical differences, | 21:09 | |
there is no doubt that his institutional position | 21:13 | |
and his emersion in the Washington climate | 21:15 | |
must unquestionably have affected him, | 21:18 | |
as it affects everybody as it is hard to believe that | 21:20 | |
anybody could fail to be affected. | 21:24 | |
How have these affected him? | 21:28 | |
In the first place, the Federal Reserve Board, | 21:30 | |
the Federal Reserve System is a large comberous machinery. | 21:33 | |
There are many people involved in it, | 21:39 | |
it has a long history, it has a great deal of inertia, | 21:40 | |
it has developed certain methods of acting, | 21:44 | |
and it has proved, | 21:47 | |
it has turned out that Arthur Burns has been far less | 21:49 | |
effective in changing that pattern of operation | 21:54 | |
that I, in advance expected that he would of been. | 21:58 | |
As I look back over what he has done these past two years, | 22:03 | |
I think one of the great problems is | 22:06 | |
that he made no changes, | 22:08 | |
essentially, or few changes, | 22:11 | |
essentially no major changes in personnel. | 22:13 | |
The people other than Arthur Burns, | 22:16 | |
who are operating the Federal Reserve System today, | 22:18 | |
are precisely those who were operating it before. | 22:22 | |
That the New York desk is being managed by Allan Holmes, | 22:25 | |
who was managing it all along before. | 22:29 | |
The research division in Washington is headed by | 22:31 | |
precisely the same man who was heading it before. | 22:35 | |
It is very difficult I believe, | 22:38 | |
to put a new policy in | 22:39 | |
without new people and I believe part of the problem | 22:42 | |
has been precisely that it has been difficult to turn | 22:46 | |
the administrative machinery around. | 22:50 | |
Thus I have no doubt in myself, | 22:52 | |
and as Arthur Burns himself stated, | 22:54 | |
that he would of preferred a very different pattern | 22:57 | |
of money supply changes this year. | 22:59 | |
But nonetheless, you got what you did get, | 23:02 | |
because the machinery was not turned around, | 23:05 | |
was not changed, was not adapted. | 23:09 | |
Again let me stress, this is not necessary, | 23:12 | |
it is not inevitable, there is not the slightest doubt, | 23:14 | |
but that the Federal Reserve could | 23:17 | |
produce a much more steady pattern of money supply growth | 23:20 | |
if it's policies were changed. | 23:24 | |
I might introduce at this point on that issue, | 23:26 | |
a little plug for the latest issue of the Federal-- | 23:29 | |
of the bullet in to the Federal Reserve bank of St. Louis, | 23:32 | |
which has an extraordinarily valuable | 23:34 | |
and important article by three people, | 23:37 | |
Burger, Kay-lish, and Bab, | 23:42 | |
on the alternative way to control money supply | 23:45 | |
and some simulated tests of how well you could do it, | 23:50 | |
and how closely you could achieve your objectives. | 23:54 | |
So I remain entirely convinced that it's possible. | 23:57 | |
Having the difficulties internally, | 24:02 | |
it is understandable that a male in that position | 24:04 | |
as all central bankers have done, | 24:07 | |
tries to find other explanations | 24:10 | |
and justifications, | 24:14 | |
other ways of attacking the problem. | 24:15 | |
He was subject to great public pressure, | 24:18 | |
he recognizes the political pressure | 24:21 | |
against stepping hard on the monetary brakes, | 24:23 | |
because of the unemployment it might produce, | 24:26 | |
yet he strongly wants to stop inflation, | 24:31 | |
so it's very natural that he looks for other ways out, | 24:33 | |
especially ways that involve | 24:38 | |
other people doing something. | 24:41 | |
That is why central bankers have almost always | 24:43 | |
tended to blame either fiscal policy of the tax--, | 24:46 | |
spending authorities, | 24:50 | |
or the unions and | 24:52 | |
concentrated industry for | 24:55 | |
the | 25:00 | |
problems that they haven't themselves been able to handle. | 25:03 | |
Rose | We had three questions on credit, | 25:08 |
that you answered in part, | 25:10 | |
but we never did get to the third question, | 25:12 | |
to what extend can the monetary authorities influence | 25:15 | |
the price and quantity of credit? | 25:18 | |
Dr. Milton | Well the price of credit, | 25:21 |
is the interest rate, | 25:23 | |
and the quantity of credit, | 25:26 | |
as I indicated in my intro to the earlier thing, | 25:28 | |
includes a wide range of things like total | 25:30 | |
mortgage debt, | 25:36 | |
bonds outstanding, short term paper, etc, etc, etc. | 25:38 | |
The most important thing, | 25:43 | |
that is important in answering this question, | 25:46 | |
is to distinguish between the price of credit | 25:49 | |
in nominal units and in real terms, | 25:52 | |
and the quantity of credit, | 25:54 | |
in nominal units and in real terms. | 25:55 | |
Let me make clear of these distinctions. | 25:59 | |
If a bond carries an 8% coupon, | 26:03 | |
and lets say that is also it's yield, | 26:08 | |
at a set par, that is selling at par, | 26:10 | |
then the nominal yield is 8%. | 26:13 | |
If prices go up at the rate of 5%, | 26:17 | |
lets say during a year, | 26:20 | |
then the real yield, the yield corrected | 26:22 | |
for the depreciation and the value of the bond, | 26:25 | |
is only 3%, that is to say that if you bought a bond | 26:29 | |
for a hundred dollars at the beginning of the year, | 26:32 | |
received eight dollars during the year, | 26:36 | |
you would have to take five dollars of the eight, | 26:38 | |
and add it to the hundred, | 26:41 | |
in order to have at the end of the year, | 26:43 | |
the same real purchasing power over goods and services | 26:45 | |
in your principle that you did before, | 26:47 | |
and you can only spend three dollars, | 26:50 | |
while still being as well off. | 26:51 | |
Consequently the nominal rate | 26:54 | |
is measured in whatever, in dollars, | 26:57 | |
the real rate, corrected for price changes. | 27:00 | |
Similarly, the nominal quantity of credit | 27:03 | |
is the total quantity expressed in dollars. | 27:05 | |
The real quantity of credit is what that will buy, | 27:08 | |
in terms of purchasing power. | 27:12 | |
This distinction is extremely important because | 27:14 | |
the monetary authorities can exert a very great influence | 27:18 | |
over both the nominal | 27:22 | |
price of credit, | 27:25 | |
the nominal interest rate on the one hand, | 27:26 | |
and the nominal quantity of credit on the other. | 27:28 | |
Let us suppose I have monetary authorities, | 27:33 | |
whose start to increase the quantity of money very rapidly, | 27:35 | |
to begin with, | 27:40 | |
this will tend, | 27:42 | |
for a brief period, | 27:43 | |
to lower nominal interest rates, | 27:45 | |
through what is called the liquidity effect because | 27:48 | |
generally speaking the way in which | 27:50 | |
they will increase the quantity of money | 27:52 | |
is by buying government securities. | 27:53 | |
Buying securities just increases the demand form, | 27:56 | |
raises their price, lowers the yield. | 27:59 | |
But this is a temporary effect, | 28:02 | |
at most it will last something like six, nine months, | 28:04 | |
that usually what is has in the past, | 28:07 | |
but then, the effect goes the other way | 28:09 | |
because the increase quantity of money causes people | 28:12 | |
to try and spend more, | 28:14 | |
it increases activity, | 28:16 | |
it causes an increase demand for loans, | 28:18 | |
and sooner or later it causes prices to start rising, | 28:20 | |
and as prices start rising you have the effect | 28:23 | |
that I was discussing a moment ago, | 28:25 | |
where by, people demand a higher nominal yield | 28:28 | |
in order to get the same real yield. | 28:31 | |
Take a specific hypothetical case, | 28:34 | |
lets suppose the quantity of money were to be raised | 28:37 | |
at 10% a year indefinitely, | 28:39 | |
and that output was going up at about 3% a year, | 28:40 | |
on the average. | 28:43 | |
Then this would mean a 7% per year rate | 28:44 | |
of rise in prices roughly, | 28:46 | |
a little different from that because demand for money | 28:48 | |
might be changing, but roughly 7%, | 28:51 | |
and then in that case a real yield of 3% would mean | 28:54 | |
a nominal yield of 10%. | 28:58 | |
You could say therefore, that under those circumstances | 29:00 | |
the monetary authorities had made | 29:03 | |
the price of credit 10% in nominal terms. | 29:04 | |
But the monetary authorities have a much less | 29:08 | |
influence on the real price of credit. | 29:11 | |
In general over long periods of time, | 29:13 | |
that real price of credit is affected by | 29:16 | |
factors other than monetary factors, | 29:19 | |
its affected by the productivity of capital, | 29:21 | |
by the desire of people to save, | 29:25 | |
by those fundamental underlining forces. | 29:27 | |
The monetary part of behavior | 29:30 | |
would influence those a little, | 29:31 | |
in ways that are more sophisticated and complicated | 29:34 | |
than I think it pays to discuss here, | 29:36 | |
but very little, and roughly speaking I think you can say, | 29:39 | |
that except for transitional effects, | 29:44 | |
when the monetary authorities change their direction, | 29:47 | |
they have very little affect on the real right. | 29:51 | |
In those transitional periods, they do, | 29:54 | |
when they first start to increase | 29:56 | |
the quantity of money more rapidly, | 29:57 | |
they lower the real rate because | 29:59 | |
the nominal rate goes down, instead of up. | 30:01 | |
If they tighten money, if they slow down | 30:04 | |
the rate of growth of the quantity of money | 30:07 | |
they will initially have an upward affect | 30:09 | |
on interest rates that will raise real rates, | 30:10 | |
and indeed one can interpret these changes in real rates, | 30:13 | |
as being the reason why the monetary authorities, | 30:16 | |
or the channel through which the monetary authorities | 30:19 | |
create recessions and booms. | 30:21 | |
Similarly with the nominal quantity of credit. | 30:24 | |
If prices start rising at 10%, | 30:28 | |
that will mean that the total amount of bonds | 30:30 | |
in dollars will tend to be going up at 10%, | 30:33 | |
the total amount of mortgages in dollars will go up 10%, | 30:35 | |
the total volume of credit, | 30:38 | |
the nominal volume of credit therefore can ultimately be | 30:41 | |
pre-well determined by the fed. | 30:44 | |
But the real quantity of credit, | 30:46 | |
again depends on these basic underlying forces, | 30:47 | |
and is not very much affected my monetary policy. | 30:50 | |
Rose | I'm afraid again, we're going to have to | 30:53 |
hang on to the rest of our questions, | 30:56 | |
and hope to answer them at a future date. | 30:58 | |
Thank you very much Professor Friedman. | 31:00 | |
Remember subscribers if you have any questions | 31:02 | |
or comments for topics you would like to hear discussed | 31:05 | |
in this series, please send them to | 31:07 | |
Instructural Dynamics Incorporated. | 31:10 | |
166 East Superior Street, | 31:12 | |
Chicago Illinois, | 31:15 | |
60611. | 31:17 | |
Dr. Friedman will be visiting with you again in two weeks. | 31:18 |
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