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Milton Friedman Speaks on Money and Inflation · Gil I Am

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  Speaker 1: M HM.
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  Speaker 2: Reality captured and user friendly symbols and processed for understanding.
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  Speaker 1: The idea channel.
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  Speaker 3: It is my great pleasure to introduce to you, Milton Friedman.
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  Speaker 1: Thank you.
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  Speaker 4: The topic I'm going to talk about tonight. I had
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  Speaker 4: thought it was announced. If not, it'll come as a
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  Speaker 4: surprise to you, but I hope not as an unpleasant surprise.
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  Speaker 4: Is a topic of money and inflation. It's not a
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  Speaker 4: topic I think there's anybody in this room who is
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  Speaker 4: uninterested in at least the inflation half of it. Most
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  Speaker 4: of you are also very interested in the money half,
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  Speaker 4: but from a different point of view. Whenever I talk
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  Speaker 4: about inflation, I am reminded of a wonderful story about
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  Speaker 4: the man who decided to take advantage of the growing
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  Speaker 4: science of cryogenics, that's the science of freezing people up
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  Speaker 4: so that they can be in deep freeze for a
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  Speaker 4: time and then restored to life. And he got himself
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  Speaker 4: put into the deep freeze for a twenty year period.
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  Speaker 4: And of course before he went into the deep freeze,
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  Speaker 4: he left all his securities and his worldly belongings at
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  Speaker 4: his brokers with instructions to do the best he could
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  Speaker 4: for him. And twenty years later, after the deep freeze
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  Speaker 4: had worked, he was unthawed and came out of the
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  Speaker 4: deep freeze, and of course the first thing he did
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  Speaker 4: was to run to the telephone to call his broker.
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  Speaker 1: And his broker said to him, will you know you're
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  Speaker 1: a millionaire many times over? Oh?
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  Speaker 4: Really, said the man, what happened to this stock? And
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  Speaker 4: the broker said, and went from here to hear, you know,
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  Speaker 4: multiplied many and ten times, twenty times? What happened to
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  Speaker 4: this stock? He kept on going, but suddenly the telephone
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  Speaker 4: operator interrupted.
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  Speaker 1: The man was just ecstatic.
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  Speaker 4: Telephone operator interrupted and said, sorry, your three minutes are up.
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  Speaker 4: That'll be two hundred and fifty thousand dollars for the
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  Speaker 4: next three minutes.
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  Speaker 1: Place. That's real inflation.
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  Speaker 4: That's a that's at the moment of story, but it's
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  Speaker 4: not a story which does not have some examples in history.
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  Speaker 4: Inflation is a disease. It's a dangerous disease for a society.
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  Speaker 4: It is sometimes a fatal disease for a society. It's
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  Speaker 4: a disease that, if allowed to rage unchecked, can destroy
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  Speaker 4: a society.
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  Speaker 1: And we have many such examples.
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  Speaker 4: The classic examples, of course, are the extreme examples of Germany,
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  Speaker 4: of Austria, of Russia after the First World War, when
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  Speaker 4: inflation really did reach levels at which the kind of
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  Speaker 4: apocryphal story I told you was a literal description of
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  Speaker 4: the reality when inflation reached levels at which employers would
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  Speaker 4: pay their workers three times a day after breakfast, lunch,
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  Speaker 4: and dinner so they could go out and spend the
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  Speaker 4: money before it lost all its value. That's the real
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  Speaker 4: extreme cases. But you don't have to go to such
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  Speaker 4: extreme cases to see the enormous harm which inflation left
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  Speaker 4: unchecked can do. You have the example in many examples
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  Speaker 4: in South America. Brazil before nineteen sixty four was brought
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  Speaker 4: down by an inflation that led to a revolution that
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  Speaker 4: toppled the existing government in order to stem the inflation.
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  Speaker 4: In the famous case of Chile, with mister Ayendi in power,
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  Speaker 4: he produced an inflation which was one of the major
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  Speaker 4: factors that caused the economic catastrophe that led to the
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  Speaker 4: replacement of his government by a military dictatorship.
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  Speaker 1: We are nowhere near that stage.
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  Speaker 4: In the United States, but it behooves us as a
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  Speaker 4: nation to pay attention to this disease, to ask ourselves,
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  Speaker 4: what is the cause of the disease?
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  Speaker 1: How do you cure the.
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  Speaker 4: Disease, what are the effects of the cure, what are
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  Speaker 4: the side effects of it? And what will happen if
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  Speaker 4: we don't cure it? And I propose to discuss the
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  Speaker 4: topic tonight under those headings, and then go on to
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  Speaker 4: consider in somewhat more specific detail the experience of the
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  Speaker 4: United States over the past decade or two and the
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  Speaker 4: present situation that we face.
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  Speaker 1: Now. The first step.
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  Speaker 4: Toward understanding the cause of inflation is to recognize that
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  Speaker 4: it is always, in everywhere, a monetary phenomenon. It's always
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  Speaker 4: an everywhere a result of too much money, of a
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  Speaker 4: more rapid increase in the quantity of money than an output. Moreover,
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  Speaker 4: in the modern era, the important next step is to
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  Speaker 4: recognize that today governments control the quantity of money, so
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  Speaker 4: that as a result, inflation in the United States is
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  Speaker 4: made in Washington and nowhere else. Of Course, no government,
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  Speaker 4: any more than any one of us, likes to take
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  Speaker 4: responsibility for bad things.
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  Speaker 1: Where all of us human, If.
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  Speaker 4: Something bad happens, it wasn't our fault, and the government
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  Speaker 4: is the same way, so it doesn't accept responsibility for inflation.
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  Speaker 4: If you listen to people in Washington talk They will
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  Speaker 4: tell you that inflation is produced by greedy businessmen, or
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  Speaker 4: it's produced by grasping unions, or it's produced by spendthrift consumers,
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  Speaker 4: or maybe it's those terrible Arab sheets who are producing.
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  Speaker 1: Now.
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  Speaker 4: Of course, businessmen are greedy, who of us isn't. Trade
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  Speaker 4: unions are grasping who of us isn't. And there's no
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  Speaker 4: doubt that the consumer is a spendthrift. At least every
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  Speaker 4: man knows that about his wife. But none of them
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  Speaker 4: produce inflation for the very simple reason that neither the businessman,
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  Speaker 4: nor the trade union, nor the housewife has a printing
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  Speaker 4: press in their basement on which they can turn out
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  Speaker 4: those green pieces of paper we call money. Only Washington
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  Speaker 4: has that printing press, and therefore only Washington can produce inflation.
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  Speaker 1: If you listen to the people from the.
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  Speaker 4: Communist world, they'll tell you inflation is a capitalist phenomenon.
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  Speaker 1: That's not true. If you look at Europe today.
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  Speaker 4: One of the most rapid rates of inflation in Europe
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  Speaker 4: has been in Yugoslavia, which is a communist country. Of
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  Speaker 4: the lowest rates of inflation has been in Switzerland, which
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  Speaker 4: is a capitalist country. So inflation is not a capitalist phenomenon,
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  Speaker 4: But neither is it a communist phenomenon. If Switzerland has
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  Speaker 4: low inflation, the United Kingdom in recent years has had
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  Speaker 4: inflation rates running up to twenty twenty five percent a year.
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  Speaker 4: Italy has inflation rates today of that order of magnitude.
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  Speaker 4: Inflation is not a capitalist phenomenon. It's not a communist phenomenon.
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  Speaker 4: It's a printing press phenomenon. Now, in saying that inflation
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  Speaker 4: is a printing press phenomenon, in saying that inflation is.
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  Speaker 1: Always caused.
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  Speaker 4: By a more rapid increase in the quantity of money
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  Speaker 4: than an output, you're only at the beginning of the
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  Speaker 4: problem because you must distinguish the immediate cause from the
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  Speaker 4: more lament cause. You must ask why is it that
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  Speaker 4: the quantity of money increases too rapidly? But before I
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  Speaker 4: go on to that question, I just want to settle
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  Speaker 4: from once and for all the point that inflation is
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  Speaker 4: a monetary phenomenon. That proposition has been documented over and
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  Speaker 4: over again. We have evidence, for the United States for
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  Speaker 4: over one hundred years, for Great Britain for two hundred years,
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  Speaker 4: for Sweden for two hundred years. There is never in
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  Speaker 4: history been an inflation that was not accompanied by an
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  Speaker 4: extremely rapid increase in the quantity of money. There is
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  Speaker 4: never in history been an extremely rapid increase in the
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  Speaker 4: quantity of money without an inflation.
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  Speaker 1: But in order to persuade you of.
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  Speaker 4: This quickly and with a minimum waste of time, I
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  Speaker 4: have brought a few pictures along to show you that
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  Speaker 4: will graphically illustrate the proposition about the relation between money
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  Speaker 4: and inflation.
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  Speaker 1: And I'd like to if we.
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  Speaker 4: Can start with the first of those slides. Now, maybe
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  Speaker 4: you can make it that there are two lines on
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  Speaker 4: that chart. That chart is for the United States, and
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  Speaker 4: it covers the thirteen years from nineteen sixty four through
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  Speaker 4: nineteen seventy six. And one of those charts, the solid line,
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  Speaker 4: is a quantity of money per unit of output, and
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  Speaker 4: the other line, which is a dashed line, is a
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  Speaker 4: consumer price index. Those two lines cross at nineteen seventy
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  Speaker 4: because that's the way they're constructed. Both of those series
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  Speaker 4: were expressed on nineteen seventy as a base of one
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  Speaker 4: hundred in order to try to get the two series
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  Speaker 4: in the same scale. But there is nothing whatsoever in
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  Speaker 4: the arithmetic of it to make those two curves the same.
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  Speaker 4: Elsewhere that, and I may say that the quantity of
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  Speaker 4: money that's plotted there is a quantity of money for
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  Speaker 4: a year ending six months before the price index, so
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  Speaker 4: that you are not.
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  Speaker 1: There's nothing funny about that.
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  Speaker 4: And you can see that the two lines are almost indistinguishable.
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  Speaker 1: Now, I've got a segment.
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  Speaker 4: Of thirteen years up there, but if I had a
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  Speaker 4: segment of one hundred years, the relationship would be the
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  Speaker 4: same way throughout the whole of that period. But you
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  Speaker 4: may say that's maybe that's only for the United States,
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  Speaker 4: But what about other countries, And so let's have the
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  Speaker 4: next slide. The next slide is for Germany for the
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  Speaker 4: same period, and again you will see the same story. Now,
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  Speaker 4: the interesting thing here is that you can see that
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  Speaker 4: the quantity of money for a while in the later
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  Speaker 4: sick later in the seventies, was running ahead of the
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  Speaker 4: price index. But now they're coming back together again. And
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  Speaker 4: that's a behavior you very often observe. The quantity of
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  Speaker 4: money per unit of output is the major factor that
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  Speaker 4: from the immediate sense, determines the price index, but it
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  Speaker 4: doesn't operate instantaneously. Sometimes there are delays of a year
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  Speaker 4: or two, but sooner or later.
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  Speaker 1: They all come back together.
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  Speaker 4: Well, the United States in Germany are very similar countries.
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  Speaker 1: What about another country.
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  Speaker 4: Let's have the third chart, and the third chart there
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  Speaker 4: it's supposed to be for Japan. I can't read it.
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  Speaker 4: Is that what it says up there, that's for Japan.
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  Speaker 4: And you will notice that the Japan experienced a much
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  Speaker 4: greater price rise than either the United States or Germany did.
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  Speaker 4: But Japan has now been coming back. It's done a
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  Speaker 4: remarkable job of controlling the quantity of money and as
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  Speaker 4: a result, the rate of price inflation in Japan has
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  Speaker 4: come down from close to thirty percent a year to
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  Speaker 4: word today in the period after this chart, it's back
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  Speaker 4: down to about seven percent. But again you have the
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  Speaker 4: same synchronism between the two charts. Now the next chart,
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  Speaker 4: let's have the next chart, which is for Great Britain.
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  Speaker 4: You can see each one of these has a little
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  Speaker 4: bit more inflation than the preceding one, but each one
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  Speaker 4: of them you again have the same relationship in every
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  Speaker 4: case between the quantity of money and prices. Now, one
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  Speaker 4: of the interesting things about that comparison between Japan and
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  Speaker 4: the United Kingdom is you will hear many people telling
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  Speaker 4: you that the real reason you have inflation is because
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  Speaker 4: of trade unions. If you listen to anybody telling you
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  Speaker 4: about Great Britain's plight, they will tell you that the
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  Speaker 4: real problem in Great Britain is that you have such
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  Speaker 4: strong trade unions that they push up wages and that
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  Speaker 4: causes inflation. Well, if that explains this relationship for Britain,
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  Speaker 4: what explains the previous chart for Japan, where trade unions
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  Speaker 4: are not very important, are much weaker than they are
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  Speaker 4: in Great Britain, Or what explains the next chart, which
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  Speaker 4: is a honey for Brazil's Can we have the last chart?
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  Speaker 4: Now that's a little that's an inflation, that's really an inflation,
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  Speaker 4: that's none of these baby inflations we've been playing with.
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  Speaker 4: Of course there are still better ones in Argentina and Chile,
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  Speaker 4: but we don't have a big enough.
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  Speaker 1: Room now here.
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  Speaker 4: Again, if trade unions cause inflation, as you know, Brazil
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  Speaker 4: has a military government and trade unions have absolutely nothing
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  Speaker 4: to say about anything except as they are branches of
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  Speaker 4: the government apparatus. So that it's clear you cannot explain
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  Speaker 4: in the case of Brazil, the inflation.
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  Speaker 1: By trade unions.
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  Speaker 4: But you can see very clearly that you can explain
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  Speaker 4: it by changes in the quantity of money. Thank you,
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  Speaker 4: we can have the lights back on them. As I say,
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  Speaker 4: that's a very small sample of the evidence that is
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  Speaker 4: available on the linkage between the quantity of money on
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  Speaker 4: the one hand and.
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  Speaker 1: Prices on the other.
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  Speaker 4: That evidence is available for hundreds of years in many countries,
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  Speaker 4: and there are no exceptions.
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  Speaker 1: But that only gets you.
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  Speaker 4: To first base. The question is why is it that
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  Speaker 4: the quantity of money increases relative to output if you
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  Speaker 4: go back one hundred years ago, and here in California
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  Speaker 4: this is very appropriate to go back a little more
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  Speaker 4: than one hundred years ago. Sometimes the quantity of money
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  Speaker 4: increased more rapidly than output because of discoveries of gold
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  Speaker 4: or precious metals. As you know, you had the gold
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  Speaker 4: rush in California in eighteen late eighteen forties, early eighteen fifties,
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  Speaker 4: you had the Australian gold discoveries, and the same period
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  Speaker 4: in eighteen fifties, and you had.
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  Speaker 1: A worldwide inflation as a result.
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  Speaker 4: In the eighteen nineties to nineteen thirteen, you had a
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  Speaker 4: worldwide inflation because of the dis of the perfection of
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  Speaker 4: the cyanide process for extracting gold from low grade ore.
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  Speaker 4: Which produced an outpouring of gold from Australia from South
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  Speaker 4: Africa to supplement the gold strikes up in Alaska. But
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  Speaker 4: those were the good old days, before the days when
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  Speaker 4: governments discovered that it could escape from that relic of
• 16:37
  Speaker 4: an earlier time, the discipline of gold, and that it
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  Speaker 4: had a much more scientific method of controlling the quantity
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  Speaker 4: of money by ending the link to gold and instead
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  Speaker 4: turning to government dominated money. And today you do not
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  Speaker 4: have inflations for those reasons. Today, Hey, you have inflation
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  Speaker 4: because governments create a very large.
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  Speaker 1: Quantity of money. The question is why do governments do
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  Speaker 1: that in today?
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  Speaker 4: In the main, there are fundamentally three reasons, in my opinion,
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  Speaker 4: why we have experienced inflation and why it is a threat.
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  Speaker 4: The first, and by far the most important, is in
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  Speaker 4: order to pay for governments spending. Now, of course I
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  Speaker 4: say the government does this. That's wrong. The government doesn't
• 17:38
  Speaker 4: do it. You do it, I do it, We the
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  Speaker 4: citizen do it. We tell the people in Washington, we
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  Speaker 4: tell our congressmen and our senators and our representatives, we
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  Speaker 4: want you to spend more money on us, but we
• 17:52
  Speaker 4: don't want you to put any taxes on us. Oh, no,
• 17:55
  Speaker 4: we don't want you to levy taxes. We want you
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  Speaker 4: to spend more, but we don't want you to tax.
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  Speaker 4: There's no way you can do the one without the other.
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  Speaker 4: The real tax on the American people is what government spends.
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  Speaker 4: If government spends four hundred If the federal government spends
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  Speaker 4: four hundred and fifty billion dollars and only raises four
• 18:18
  Speaker 4: hundred billion dollars in taxes, who do you who pays
• 18:21
  Speaker 4: out other fifty billion dollars? Do you suppose the tooth fairy?
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  Speaker 4: Does you pay us?
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  Speaker 1: And I pay it?
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  Speaker 4: And one of the ways we pay it is by
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  Speaker 4: the tax, which we call inflation. Inflation is, from this
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  Speaker 4: point of view, a form of taxation. If government spends
• 18:46
  Speaker 4: more than it takes in in the form of things
• 18:49
  Speaker 4: that are called taxes, it has to meet the difference,
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  Speaker 4: either by printing money or by borrowing from the public
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  Speaker 4: at large. Printing money is a very attractive device, because inflation,
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  Speaker 4: from the point of view of a person sitting in
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  Speaker 4: Congress or in the Senate, is a wonderful tax.
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  Speaker 1: He doesn't have to vote for it.
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  Speaker 4: Have you ever known of a congressman who got up
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  Speaker 4: and said, I vote to impose a tax in the
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  Speaker 4: form of inflation of ten percent next year, No, sirree.
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  Speaker 4: Inflation is a tax which is imposed without representation, in
• 19:34
  Speaker 4: which nobody has to vote for. And of course it's
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  Speaker 4: a marvelous tax from the point of view of a
• 19:39
  Speaker 4: congressman trying to meet the demands of his constituents for
• 19:43
  Speaker 4: more spending. Inflation is its taxation yields tax.
• 19:52
  Speaker 1: Revenue in three different ways. It yields it.
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  Speaker 4: Directly, we think of these pieces of paper we ca
• 20:00
  Speaker 4: carry in our.
• 20:00
  Speaker 1: Pocket is money.
• 20:02
  Speaker 4: But it would be just as accurate to think of
• 20:05
  Speaker 4: those as receipts for the taxes you've paid. If you
• 20:11
  Speaker 4: pay the government one hundred dollars directly in taxes, the
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  Speaker 4: government sends you back a receipt you paid us one
• 20:15
  Speaker 4: hundred dollars in taxes. Well, now, the beauty of printing
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  Speaker 4: money is that the receipt is right straight with the
• 20:22
  Speaker 4: payment of taxes. What you're getting there is not money
• 20:27
  Speaker 4: but tax receipts. And from the point of view of
• 20:31
  Speaker 4: the government, those pieces of paper, and I'm exaggerating, of course,
• 20:34
  Speaker 4: they are not really pieces of paper. That's only the
• 20:37
  Speaker 4: primitive way of doing it. In our modern age, we
• 20:39
  Speaker 4: do it in a more sophisticated way, through using a
• 20:43
  Speaker 4: bookkeeper's pen or a computer instead of having to turn
• 20:46
  Speaker 4: the printing press. It's in the form called deposits, one
• 20:51
  Speaker 4: of the most misleading terms in the human language. When
• 20:54
  Speaker 4: I think of a deposit, I think I put something there,
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  Speaker 4: and there it is. But you know, when you go
• 20:59
  Speaker 4: into a bank and deposit money, the people behind the
• 21:03
  Speaker 4: counter run as fast as they can to another part
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  Speaker 4: of the bank to pay it out over another counter
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  Speaker 4: in the form.
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  Speaker 1: Of loans, it's not deposited there.
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  Speaker 4: And similarly, when the government sends a check, it may
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  Speaker 4: in effect be doing the equivalent of printing paper money.
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  Speaker 4: I won't go into the details of that process. You
• 21:25
  Speaker 4: will get the right answer if you think of it
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  Speaker 4: strictly as printing paper money.
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  Speaker 1: So when the.
• 21:38
  Speaker 4: Government gets revenue from inflation directly in the form of
• 21:42
  Speaker 4: these pieces of paper, it can go out and spend
• 21:44
  Speaker 4: without having gotten taxes from anybody. But it also gets
• 21:48
  Speaker 4: revenue in two other ways. In the first place, with
• 21:53
  Speaker 4: a kind of tax system we have, inflation raises other
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  Speaker 4: kinds of taxes.
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  Speaker 1: Without anybody having to vote for it.
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  Speaker 4: You might think that if prices go up by ten
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  Speaker 4: percent and your income goes up by ten percent, you're
• 22:10
  Speaker 4: in the same position as you were before, but you're
• 22:12
  Speaker 4: not You're pushed up into higher brackets of the income tax.
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  Speaker 4: And on the average if your income, if prices go
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  Speaker 4: up ten percent and your income goes up ten percent,
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  Speaker 4: your taxes will go up fifteen percent. So that the
• 22:30
  Speaker 4: Congress again is in a marvelous position it can vote
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  Speaker 4: to lower tax rates when in fact taxes are going up.
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  Speaker 4: There's a lot of talk in the papers these days
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  Speaker 4: and the news these days about the President proposing a
• 22:44
  Speaker 4: tax cut next year.
• 22:47
  Speaker 1: That's pure fiction.
• 22:49
  Speaker 4: Nobody is proposing a tax cut. These much publicized tax
• 22:53
  Speaker 4: cuts of the past few years have not been tax
• 22:56
  Speaker 4: cuts at all. Inflation is raised taxes, and the so
• 23:01
  Speaker 4: called tax cuts is given back a small part of
• 23:04
  Speaker 4: that to the taxpayer, but the actual taxes the taxpayers
• 23:10
  Speaker 4: have paid have gone up as a result of the
• 23:13
  Speaker 4: automatic effects of inflation. In the third place, the government
• 23:19
  Speaker 4: gets revenue from inflation by repudiating its debt. Many people
• 23:27
  Speaker 4: keep worrying about the government debt. That's not something you
• 23:30
  Speaker 4: should worry about because the government debt today is smaller.
• 23:37
  Speaker 4: The official that is, the announced government debt, the open
• 23:40
  Speaker 4: and above board government debt, bonds outstanding and the like,
• 23:44
  Speaker 4: is smaller as a percentage of the national income than
• 23:49
  Speaker 4: it was twenty thirty years ago.
• 23:54
  Speaker 1: How can that happen?
• 23:55
  Speaker 4: Every year we have deficits, How can the debt be
• 23:57
  Speaker 4: going down? Because they're not real deficits. They are deficits
• 24:03
  Speaker 4: that have been financed by inflation. Anybody who has bought
• 24:09
  Speaker 4: government securities in the past ten years has paid the
• 24:12
  Speaker 4: government for the privilege of lending to it. Anybody who
• 24:21
  Speaker 4: has bought a long term government bond and then redeemed
• 24:24
  Speaker 4: it has gotten back an amount of money which has
• 24:27
  Speaker 4: less purchasing power, less power, less ability to buy goods
• 24:31
  Speaker 4: and services than the sum he initially paid for the bond.
• 24:35
  Speaker 4: And to add insult to injury, he's had to pay
• 24:38
  Speaker 4: taxes on what they call interest. And as a result,
• 24:46
  Speaker 4: the debt has gone down in meaningful terms. So that
• 24:51
  Speaker 4: inflation is a marvelous resource for a government in all
• 24:55
  Speaker 4: three of these ways. That, as I I think has
• 25:01
  Speaker 4: been the main reason throughout history, not only now, but going.
• 25:06
  Speaker 1: Back for thousands of years.
• 25:08
  Speaker 4: You know, you had a great inflation during the time
• 25:10
  Speaker 4: of the Roman Empire, when Diocletian was emperor. He did
• 25:15
  Speaker 4: it in a different way. He did it by taking nice, good,
• 25:20
  Speaker 4: full bodied silver coins and replacing the silver by an
• 25:26
  Speaker 4: ally that was worthless, until there was less and less silver,
• 25:30
  Speaker 4: until one of the history books talks about the ancient denarius,
• 25:35
  Speaker 4: which used to be a full bodied silver coin, finally
• 25:38
  Speaker 4: having become in Diocletian's era little more than a copper
• 25:42
  Speaker 4: coin with a wash of silver. Now, I happened to
• 25:46
  Speaker 4: come across that quotation the same year in which the
• 25:50
  Speaker 4: American Treasury was replacing our full bodied silver coin by
• 25:54
  Speaker 4: a copper coin with not even a wash of silver,
• 25:57
  Speaker 4: only of nickel. History does repeat itself, So that's been
• 26:07
  Speaker 4: always throughout history a major reason why you have had
• 26:10
  Speaker 4: creation of money to finance government expenditures.
• 26:14
  Speaker 1: But we've added.
• 26:14
  Speaker 4: Another reason in these days, and that's allegedly to promote
• 26:19
  Speaker 4: full employment.
• 26:21
  Speaker 1: In the post war world.
• 26:23
  Speaker 4: After World War Two, every country in the West has
• 26:26
  Speaker 4: had a full employment policy, which means not that we've
• 26:31
  Speaker 4: had full employment. On the contrary, as you know, we've
• 26:34
  Speaker 4: been having increasing unemployment in recent years, but that every
• 26:38
  Speaker 4: time for quite a period there was a threat of
• 26:42
  Speaker 4: unemployment or unemployment started to rise, there was a strong
• 26:46
  Speaker 4: tendency by government to say, we've got to do something
• 26:49
  Speaker 4: about this. We have to print more money, we have
• 26:52
  Speaker 4: to spend more money, we have to stimulate the economy,
• 26:57
  Speaker 4: the result of which has been to create an increased
• 27:01
  Speaker 4: quantity of money that in the first instance has had
• 27:04
  Speaker 4: some favorable effects on employment, but only temporarily, only so
• 27:09
  Speaker 4: long as you could fool the people, and then when
• 27:12
  Speaker 4: people got on to what was going on, it came
• 27:16
  Speaker 4: out in the form of inflation. In the United States,
• 27:20
  Speaker 4: we've also had, and in most countries, a third, less
• 27:25
  Speaker 4: important factor that has contributed to excess of increases in
• 27:28
  Speaker 4: the quantity of money, and that has been mistaken policies
• 27:32
  Speaker 4: by the central bank. Professor Seekin referred to the mistake
• 27:38
  Speaker 4: of the Federal Reserve Bank in the nineteen late twenties
• 27:42
  Speaker 4: early thirties. From nineteen twenty nine to nineteen thirty three,
• 27:46
  Speaker 4: the quantity of money in the United States went down
• 27:49
  Speaker 4: by a third, and that was a major factor that
• 27:52
  Speaker 4: produced the catastrophe. That was a great mistake of the
• 27:56
  Speaker 4: Federal Reserve. It learned from that mistake, government agencies, like people,
• 28:03
  Speaker 4: don't always make the same mistake the next time. They
• 28:05
  Speaker 4: make a different one, And since that period, the central
• 28:10
  Speaker 4: banks have tended to make the mistake in the opposite direction.
• 28:14
  Speaker 4: Their mistake has almost always been caused by confusing their function,
• 28:20
  Speaker 4: by thinking that they had something to do with interest rates,
• 28:23
  Speaker 4: instead of recognizing that their real function was to control
• 28:26
  Speaker 4: the quantity of money. Now, most of you will be
• 28:32
  Speaker 4: inclined to say, well, that's all very well, but aren't
• 28:36
  Speaker 4: there some important things you've left out? Of course, the
• 28:40
  Speaker 4: most obvious thing you would have told me I left
• 28:42
  Speaker 4: out was trade union behavior. But I hope I've already
• 28:47
  Speaker 4: persuaded you that that's not a fundamental source of inflation.
• 28:53
  Speaker 4: Trade unions may do a great deal of harm in
• 28:55
  Speaker 4: a great many ways. Trade unions have done Brittany enormous harm,
• 29:00
  Speaker 4: but they are not responsible for Britain's inflation. Higher wages
• 29:05
  Speaker 4: are in the main a consequence of inflation and not
• 29:07
  Speaker 4: a cause of it. And as I say, the examples
• 29:10
  Speaker 4: of these charts I gave you before, I hope will
• 29:13
  Speaker 4: show that anybody who thinks that's a fundamental cause of
• 29:16
  Speaker 4: inflation had better pause for a bit. But there are
• 29:20
  Speaker 4: two other factors that people are inclined to cite. One
• 29:25
  Speaker 4: is to say, what about international influences. The government is
• 29:31
  Speaker 4: particularly fond of citing this to say, oh, well, you
• 29:34
  Speaker 4: mustn't blame us for inflation. We've imported it from abroad.
• 29:38
  Speaker 4: There's a worldwide inflation, and how can you expect the
• 29:41
  Speaker 4: United States to stay clear of inflation of all the
• 29:45
  Speaker 4: rest of the countries of the world are inflating.
• 29:49
  Speaker 1: Now, that was a valid explanation.
• 29:52
  Speaker 4: Before nineteen seventy one, when we had a worldwide system
• 29:57
  Speaker 4: of fixed exchange rates. In that case, it is true
• 30:04
  Speaker 4: that inflation in one country would tend to spill over
• 30:06
  Speaker 4: into another because it would.
• 30:08
  Speaker 1: Influence a quantity of money.
• 30:11
  Speaker 4: In that case, it was inflation in America that produced
• 30:15
  Speaker 4: in the United States, that produced inflation in many countries
• 30:18
  Speaker 4: around the world because their currencies were linked through a
• 30:23
  Speaker 4: fixed exchange rate with ours. But today that explanation is
• 30:28
  Speaker 4: not valid as long as countries have variable, floating, flexible
• 30:35
  Speaker 4: exchange rates between their currencies. Inflation is a national phenomenon
• 30:39
  Speaker 4: and not an international phenomenon.
• 30:42
  Speaker 1: And the proof of that is very simple.
• 30:45
  Speaker 4: If inflation is a worldwide phenomenon, if it's a I'm sorry,
• 30:50
  Speaker 4: inflation is a worldwide phenomenon. But it's not an international phenomenon.
• 30:56
  Speaker 4: You know, in every country of the world you have
• 30:58
  Speaker 4: too high taxes. But high taxation is not an international phenomenon.
• 31:03
  Speaker 4: It's just that all the nations of the world do
• 31:05
  Speaker 4: it at the same time.
• 31:07
  Speaker 1: In the same way. You have inflation in many countries.
• 31:10
  Speaker 4: But if it were an international phenomenon, how come it's
• 31:12
  Speaker 4: roughly zero to one percent in Switzerland, four to five
• 31:16
  Speaker 4: or six percent in Germany, ten percent in France, eighteen
• 31:20
  Speaker 4: percent in Great Britain, maybe higher than that in Italy,
• 31:25
  Speaker 4: and so on down the line.
• 31:27
  Speaker 1: No, inflation is a national phenomenon.
• 31:31
  Speaker 4: Produced by monetary policy and other policies within the countries. Now,
• 31:37
  Speaker 4: the second argument that will be made, you've left out
• 31:40
  Speaker 4: of this picture productivity in those charts. What was it
• 31:45
  Speaker 4: that I connected with prices? It was not simply the
• 31:49
  Speaker 4: quantity of money. It was a quantity of money per
• 31:53
  Speaker 4: unit of output. And it's true anything that increases output
• 31:58
  Speaker 4: will tend to hold down prices. And so it's very
• 32:02
  Speaker 4: common for people to say, well, the real source of
• 32:05
  Speaker 4: inflation is that our productivity has not been increasing as
• 32:11
  Speaker 4: much as it should, or to say that the real
• 32:13
  Speaker 4: cure for inflation is to increase productivity. Now, productivity is
• 32:18
  Speaker 4: an enormously important phenomenon from the point of view of
• 32:22
  Speaker 4: our standard of life, of how well we live, there's
• 32:26
  Speaker 4: nothing that's more important. If we can get a rate
• 32:30
  Speaker 4: of real growth of three percent instead of two percent,
• 32:34
  Speaker 4: that will make a great difference over a period of time.
• 32:37
  Speaker 1: And I don't doubt that one of our.
• 32:39
  Speaker 4: National problems is a fall off in the growth in productivity.
• 32:44
  Speaker 4: But from the point of view of inflation, it's the
• 32:47
  Speaker 4: wrong order of magnitude. It would be a tremendous achievement
• 32:52
  Speaker 4: to raise the average rate of growth of real output
• 32:55
  Speaker 4: in this country from three percent a year to four
• 32:57
  Speaker 4: percent a year. That would be a thirty three and
• 33:00
  Speaker 4: a third percent increase. It would be a dramatic change,
• 33:04
  Speaker 4: but it would reduce the rate of inflation by one
• 33:07
  Speaker 4: percentage point a year. And from that point of view,
• 33:13
  Speaker 4: the possible variations in the quantity of money are much
• 33:15
  Speaker 4: greater than the variations in output and productivity. So from
• 33:21
  Speaker 4: the point of view of inflation, productivity is very much
• 33:26
  Speaker 4: of a bit actor on the stage, the lead, the
• 33:31
  Speaker 4: hero or the villain.
• 33:32
  Speaker 1: As you wish.
• 33:32
  Speaker 4: It is not productivity, but what happens to the quantity
• 33:37
  Speaker 4: of money now so much for the cause of inflation.
• 33:43
  Speaker 4: It's very easy to say what the cure is. There's
• 33:47
  Speaker 4: no problem how to stop inflation. That's the easiest thing
• 33:50
  Speaker 4: in the world to say. In order to stop inflation,
• 33:54
  Speaker 4: you have to have the government spend less and print less.
• 33:58
  Speaker 4: That's the only way you're going to stop inflation. That's
• 34:03
  Speaker 4: the one and only cure. But you know the real
• 34:07
  Speaker 4: problem isn't to know how to cure inflation. The real
• 34:11
  Speaker 4: problem is to have the political will to do so.
• 34:14
  Speaker 4: If I may go back to my medical analogy. Some
• 34:18
  Speaker 4: years ago, my physician told me about a young man
• 34:21
  Speaker 4: who was a patient of his who had a debilitating
• 34:24
  Speaker 4: disease as a result of which is fingers were threatening
• 34:28
  Speaker 4: to fall off.
• 34:28
  Speaker 1: His toes were threatening to fall off.
• 34:31
  Speaker 4: And my physician said, you know, that young man could
• 34:33
  Speaker 4: be cured in no time. The only thing he has
• 34:36
  Speaker 4: to do to be cured is to stop smoking. But
• 34:40
  Speaker 4: I cannot in any way bring him to stop smoking.
• 34:43
  Speaker 1: He refuses to do it.
• 34:46
  Speaker 4: Now, the disease was curable in one sense, but it
• 34:49
  Speaker 4: was not easy to do it. An analogy that in
• 34:52
  Speaker 4: some ways is much closer to the problem of inflation
• 34:56
  Speaker 4: it's a very literal analogy, but also something of a
• 35:00
  Speaker 4: medical analogy is alcoholism. The thing about alcoholism is that
• 35:06
  Speaker 4: when you go out on a toot, the good effects
• 35:09
  Speaker 4: come first, and the bad effects only come the next
• 35:12
  Speaker 4: morning when you have a hangover. Now, that's exactly the
• 35:16
  Speaker 4: way it is with inflation. When you start inflating, the
• 35:21
  Speaker 4: good effects come first. After all, the government's sprinting money.
• 35:25
  Speaker 4: Everybody thinks he's richer, he's got all these pieces of paper.
• 35:30
  Speaker 4: And initially it does have that effect. It makes business good,
• 35:34
  Speaker 4: it expands output. It's only after a while, when it
• 35:37
  Speaker 4: works its way through to inflation, that the bad effects
• 35:41
  Speaker 4: come later, and you then have inflation. Similarly, on the
• 35:49
  Speaker 4: other side, the great problem in curing an alcoholic is
• 35:55
  Speaker 4: that the bad effects come first and the good effects
• 35:58
  Speaker 4: come later when you try to cure. If a man
• 36:02
  Speaker 4: who has been subject to craving for alcohol goes off
• 36:07
  Speaker 4: the wagon, it's terrible. He's got a terrible time getting
• 36:12
  Speaker 4: rid of his craving. But if he once can succeed
• 36:15
  Speaker 4: in doing so, everything will be fine. It's exactly the
• 36:18
  Speaker 4: same thing with inflation.
• 36:22
  Speaker 1: If you.
• 36:25
  Speaker 4: First, if you succeed in slowing down inflation, you will
• 36:29
  Speaker 4: initially have some very difficult times. Just as inflating stimulates
• 36:37
  Speaker 4: the economy temporarily, so slowing down inflation slows down the
• 36:42
  Speaker 4: economy temporarily.
• 36:46
  Speaker 1: A more direct.
• 36:47
  Speaker 4: Reason why it's difficult to apply the cure is because
• 36:52
  Speaker 4: it's not so clear that people.
• 36:54
  Speaker 1: Want to stop inflation.
• 36:56
  Speaker 4: If I ask people, are you in favor of inflation
• 36:59
  Speaker 4: or not? Everybody's against inflation. But when I explore a
• 37:03
  Speaker 4: little bit further, if I say to people, tell me,
• 37:06
  Speaker 4: have you gained from inflation?
• 37:09
  Speaker 1: Oh? No, you say, I haven't gained.
• 37:11
  Speaker 4: And yet the fact is that a great many people
• 37:14
  Speaker 4: have gained from inflation.
• 37:15
  Speaker 1: There are many, many people who have benefited.
• 37:18
  Speaker 4: Of course, the major gainer from inflation is a federal treasury,
• 37:22
  Speaker 4: as I've already said, But almost everybody who has bought
• 37:25
  Speaker 4: a home in the past thirty years has gained from inflation.
• 37:30
  Speaker 4: He was able to borrow on a mortgage, which inflation
• 37:34
  Speaker 4: is paid off along with paying off the government debt,
• 37:37
  Speaker 4: so that almost all homeowners in this country are beneficiaries
• 37:41
  Speaker 4: from inflation. Indeed, one of the things that makes inflation
• 37:47
  Speaker 4: such a bad social disease is precisely that it tends
• 37:53
  Speaker 4: to be divisive because some people do very well during
• 37:57
  Speaker 4: an inflation period and some people do very badly, and
• 38:01
  Speaker 4: as a result, the population gets split into people who
• 38:05
  Speaker 4: are seeming in great prosperity and people who are in
• 38:09
  Speaker 4: great distress. When most people say they want to stop inflation,
• 38:16
  Speaker 4: what they mean is that they want the prices of
• 38:20
  Speaker 4: the things they buy to go down and the prices
• 38:24
  Speaker 4: of the things they sell to go up. But since
• 38:30
  Speaker 4: what one man sells is what another man buys, that's
• 38:33
  Speaker 4: a neat trick if you can do it. And as
• 38:37
  Speaker 4: a result, people aren't really serious when they say they
• 38:40
  Speaker 4: want to stop inflation. Certainly not in the early stages,
• 38:43
  Speaker 4: not before they fully understand, not before it's gotten to
• 38:46
  Speaker 4: the point where it is really creating serious social problems.
• 38:51
  Speaker 4: Everybody wants to stop inflation at somebody else's expense. Now
• 38:59
  Speaker 4: I've already said that if you start to cure inflation,
• 39:04
  Speaker 4: you will get some bad effects. First, let me emphasize
• 39:09
  Speaker 4: that those bad effects are not themselves a cure.
• 39:14
  Speaker 1: They are side effects of a cure.
• 39:17
  Speaker 4: If you have your appendix out, if you go to
• 39:20
  Speaker 4: a doctor and say, and he says you have appendicitis,
• 39:23
  Speaker 4: you've got to take your appendix out. But after your
• 39:26
  Speaker 4: appendix is out, you'll have to stay in bed. It
• 39:28
  Speaker 4: used to be two weeks, now it's ten minutes. But
• 39:32
  Speaker 4: you'll have to stay in bed for a little bit.
• 39:35
  Speaker 4: And you say to him, well, you know, I think
• 39:37
  Speaker 4: I'll just stay in bed and not have the operation.
• 39:41
  Speaker 1: That isn't going to cure you.
• 39:44
  Speaker 4: And in the same way, unemployment is not a cure
• 39:48
  Speaker 4: for inflation. I can tell you one hundred ways to
• 39:51
  Speaker 4: create unemployment that will produce more inflation, not less. I
• 39:57
  Speaker 4: may say that used to be a proposition that people
• 40:00
  Speaker 4: it difficult to understand, but the experience of the past
• 40:05
  Speaker 4: ten years or so has done a great deal to
• 40:07
  Speaker 4: make people understand that it's perfectly possible to have unemployment
• 40:12
  Speaker 4: and inflation go along simultaneously. In fact, we've coined some
• 40:17
  Speaker 4: ugly new words like stagflation and slumpflation to try to
• 40:22
  Speaker 4: explain this phenomenon, or I shouldn't say.
• 40:24
  Speaker 1: To explain it, to name it.
• 40:28
  Speaker 4: So, unemployment is not a cure for inflation, but it
• 40:33
  Speaker 4: is an almost inevitable side effect of an effective cure.
• 40:39
  Speaker 1: Now why should that be?
• 40:41
  Speaker 4: Why is it that there seems to be no way
• 40:45
  Speaker 4: to cure inflation? Without going through at least a temporary
• 40:49
  Speaker 4: period of relatively slow growth and relatively high unemployment. The
• 40:56
  Speaker 4: answer is fundamental because of the time delays between the
• 41:05
  Speaker 4: turning of the printing press and the element effects on
• 41:10
  Speaker 4: output and on prices. Both ways you produce the same result.
• 41:16
  Speaker 4: Look on the upgrade. Suppose the government first prints money
• 41:19
  Speaker 4: and spends it to pay for its expenses. To begin with,
• 41:26
  Speaker 4: the people who find themselves doing better business.
• 41:29
  Speaker 1: Don't know what, don't know what. The explanation is.
• 41:33
  Speaker 4: Government is paying more money, Its employees have better salaries.
• 41:37
  Speaker 4: They're coming to the store and buying more goods. The
• 41:40
  Speaker 4: storekeeper is delighted to sell them at the same prices
• 41:42
  Speaker 4: as before. Each man thinks this is something special happening
• 41:46
  Speaker 4: to him. The shoe manufacturer says, ah, look, I can
• 41:51
  Speaker 4: sell more shoes.
• 41:51
  Speaker 1: The demand for shoes is going up.
• 41:54
  Speaker 4: He doesn't recognize that what's really happening is that demand
• 41:58
  Speaker 4: is going up everywhere. And then, not only is the
• 42:01
  Speaker 4: demand for shoes going up, but he's going to have
• 42:03
  Speaker 4: to pay more to get labor. He's going to have
• 42:04
  Speaker 4: to get paid more to get leather. He's going to
• 42:07
  Speaker 4: have to pay more to produce his products. But when
• 42:10
  Speaker 4: that shows up, when after a while he finds out
• 42:15
  Speaker 4: that his costs are up, then he suddenly discovers that
• 42:18
  Speaker 4: he has to raise his prices to make both ends meet.
• 42:21
  Speaker 4: And that's why, on the average in the United States
• 42:25
  Speaker 4: over the past hundred years, an increase in the quantity
• 42:29
  Speaker 4: of money has taken about five or six months to
• 42:32
  Speaker 4: affect people spending. The first thing that happened is people
• 42:35
  Speaker 4: just have bigger bank accounts.
• 42:37
  Speaker 1: Then it takes them a little.
• 42:38
  Speaker 4: While to realize that and they start spending it, and
• 42:41
  Speaker 4: then it's another twelve to eighteen months before that works
• 42:46
  Speaker 4: through into prices.
• 42:48
  Speaker 1: So on the average over the past one hundred.
• 42:52
  Speaker 4: Years, and in the Britain it's been for two hundred years.
• 42:56
  Speaker 4: I say one hundred years because that's as far back
• 42:58
  Speaker 4: as our data go. In the United States, there's been
• 43:01
  Speaker 4: about a two year interval between a more rapid increase
• 43:06
  Speaker 4: in the quantity of money on the one hand and
• 43:09
  Speaker 4: the inflationary effects of it on the other.
• 43:12
  Speaker 1: But the same thing happens the other way.
• 43:15
  Speaker 4: If the government slows down its spending in the first instance,
• 43:19
  Speaker 4: people simply experience that as slower demand for their products,
• 43:24
  Speaker 4: and they tend to retrench They tend to say, well,
• 43:28
  Speaker 4: my inventories are going up, I better cut back production.
• 43:32
  Speaker 4: It's only after a considerable interval that that's reflected in
• 43:37
  Speaker 4: lower prices or in a slower rate of increase in prices,
• 43:40
  Speaker 4: and works its way through. So there is no way
• 43:47
  Speaker 4: that I know to avoid the interim effect of slowing
• 43:51
  Speaker 4: down inflation. In the long run, there is no relation
• 43:58
  Speaker 4: between inflation and unemployed on the average. Suppose a country
• 44:04
  Speaker 4: gets accustomed to ten percent inflation. That's perfectly lovable. That's
• 44:09
  Speaker 4: something people can get along with. What will happen. Everybody
• 44:13
  Speaker 4: will know that it's going on. All wages will automatically
• 44:16
  Speaker 4: tend to go up by ten percent more a year
• 44:18
  Speaker 4: than they otherwise would. All prices will tend to go
• 44:21
  Speaker 4: up by ten percent more. Instead of interest rates being
• 44:24
  Speaker 4: five percent, they will be fifteen percent.
• 44:28
  Speaker 1: Everything will get adjusted.
• 44:29
  Speaker 4: To it, and then we have a great deal of
• 44:32
  Speaker 4: evidence that the average rate of inflation over a period
• 44:36
  Speaker 4: of time has no relationship at all with the average
• 44:40
  Speaker 4: rate of growth or the average level of unemployment. The
• 44:44
  Speaker 4: thing is that only surprises matter. It isn't inflation that
• 44:52
  Speaker 4: produces a stimulus. It's only higher inflation than you expected.
• 44:57
  Speaker 4: It's only the surprise. If you get adjusted to it,
• 45:02
  Speaker 4: it doesn't do any good. It's just like again alcoholism
• 45:04
  Speaker 4: and drug addiction. When a fella first gets started on drinking,
• 45:12
  Speaker 4: all it takes is one drink to make him happy,
• 45:16
  Speaker 4: But after his body gets adjusted to that, it takes
• 45:18
  Speaker 4: a little more and pretty soon he's taking a half
• 45:21
  Speaker 4: a bottle. Similarly, with drugs, it takes bigger and bigger
• 45:26
  Speaker 4: doses to have the same effect. And similarly with inflation,
• 45:30
  Speaker 4: as a country gets accustomed to higher and higher rates
• 45:33
  Speaker 4: of inflation, it needs a bigger dose to have any
• 45:38
  Speaker 4: stimulating effect. So in the long run there is no relation,
• 45:44
  Speaker 4: but in the short run there certainly is. There's no
• 45:47
  Speaker 4: way to avoid these side effects. But those side effects
• 45:51
  Speaker 4: can be minimized by trying to take the cure gradually
• 45:57
  Speaker 4: instead of overnight. Here we are in this nation with
• 46:03
  Speaker 4: a base rate of inflation at the moment somewhere around
• 46:06
  Speaker 4: seven percent. It would be a mistake to try to
• 46:09
  Speaker 4: bring that down to zero next year. We ought to
• 46:11
  Speaker 4: do it over a three or four year period to
• 46:13
  Speaker 4: give people a chance to adjust. We can also minimize
• 46:18
  Speaker 4: the side effects of inflation, in my opinion by adopting
• 46:22
  Speaker 4: a widespread program of escalator clauses, particularly with respect to
• 46:27
  Speaker 4: government obligations, particularly with respect to taxes. I think it
• 46:34
  Speaker 4: is a disgrace, in a scandal, that we have not
• 46:36
  Speaker 4: had a legislation which has adjusted the income tax system
• 46:44
  Speaker 4: so that inflation does not automatically raise rates. Congress has
• 46:49
  Speaker 4: been very quick to index its own salaries. Congress has
• 46:55
  Speaker 4: been very quick to index the salaries of government employees,
• 46:59
  Speaker 4: but it has been very reluctant to apply the same
• 47:04
  Speaker 4: principle to the taxes that it imposes on the citizen.
• 47:09
  Speaker 4: I must say myself, I would go the other way.
• 47:14
  Speaker 4: I would like to see the taxes indexed, and with
• 47:16
  Speaker 4: respect of the salaries of Congress and of government officials,
• 47:20
  Speaker 4: I would index them perversely. Every five percent inflation is
• 47:25
  Speaker 4: a five percent reduction in their salary. And I assure you,
• 47:28
  Speaker 4: if you did that, you'd cure.
• 47:29
  Speaker 1: Inflation real fast.
• 47:34
  Speaker 4: One more general point, what if we don't cure inflation,
• 47:40
  Speaker 4: we have no good choices. If we don't cure inflation,
• 47:46
  Speaker 4: if we continue at high rates of inflation, we'll also
• 47:49
  Speaker 4: have high unemployment. One of the main reasons is because
• 47:54
  Speaker 4: of the false cures that will be attempted. In every
• 47:58
  Speaker 4: country that has had great inflation, the governments have resorted
• 48:02
  Speaker 4: sooner or later to wage and price controls, supposedly as
• 48:07
  Speaker 4: an attempt to cure inflation. We did that in this
• 48:10
  Speaker 4: country in nineteen seventy one, with disastrous results. Wage and
• 48:15
  Speaker 4: price controls are not a cure for inflation. In fact,
• 48:19
  Speaker 4: wage and price controls, you will find, are imposed by
• 48:22
  Speaker 4: governments that want to inflate.
• 48:25
  Speaker 1: But want to conceal it from the populace.
• 48:28
  Speaker 4: Governments want to get a short term benefit by pumping
• 48:32
  Speaker 4: up the economy, but they want the populace to think
• 48:35
  Speaker 4: they're doing something about inflation, so they announce with great
• 48:39
  Speaker 4: fanfare that they're fixing prices and wages. But the result
• 48:45
  Speaker 4: is only to hold down, to conceal the inflation for
• 48:48
  Speaker 4: a year or two, and then have it blow up,
• 48:51
  Speaker 4: which is of course exactly what happened in nineteen After
• 48:54
  Speaker 4: nineteen seventy one. In light of this background, I come
• 48:58
  Speaker 4: to the final point I want to make. I think
• 49:00
  Speaker 4: it's very instructive to look at recent US history. Our
• 49:05
  Speaker 4: inflation really started in the post war period in the
• 49:08
  Speaker 4: nineteen fifties. In the nineteen fifties, we started to have.
• 49:13
  Speaker 4: We first had a very substantial inflation during the Korean War,
• 49:17
  Speaker 4: and then after that was over, we had a creeping inflation.
• 49:26
  Speaker 4: It was an accident that that nineteen fifties inflation didn't
• 49:30
  Speaker 4: continue and grow from.
• 49:32
  Speaker 1: That point on, But we had a political accident.
• 49:36
  Speaker 4: We had a non political president who was willing to
• 49:40
  Speaker 4: risk the reelection the election of his vice president in
• 49:45
  Speaker 4: order to stop the inflation. Mister Eisenhower was willing to
• 49:51
  Speaker 4: take the unpopular measures that stopped inflation, that put us
• 49:58
  Speaker 4: back on a non inflationtionary source. By approving measures it
• 50:03
  Speaker 4: led to a series of recessions in nineteen fifty eight
• 50:07
  Speaker 4: and then in nineteen sixty by holding down government spending,
• 50:12
  Speaker 4: holding down government money creation, so that from an inflation rate.
• 50:18
  Speaker 1: Which at that time was regarded as.
• 50:20
  Speaker 4: Terrible of three three and a half percent, it was
• 50:23
  Speaker 4: brought back to essentially zero. Our real inflation started in
• 50:30
  Speaker 4: the early nineteen sixties when John F. Kennedy inherited this
• 50:37
  Speaker 4: windfall of a non inflationary environment as a result of
• 50:40
  Speaker 4: President Eisenhower's policies, and from sixty on we have been
• 50:46
  Speaker 4: on a roller coaster. We have been going up in inflation.
• 50:49
  Speaker 4: We have been coming down. We've been going up, and
• 50:52
  Speaker 4: we've been coming down. Every time we go up, there's
• 50:55
  Speaker 4: a great outcry we have to do something about stopping inflation,
• 50:59
  Speaker 4: and so we tend to step on the brakes.
• 51:01
  Speaker 1: That tends to produce a downturn.
• 51:03
  Speaker 4: But the moment on employment starts going up, there's an
• 51:06
  Speaker 4: even bigger outcry. We have to do something about the unemployment.
• 51:10
  Speaker 4: So we reverse and step on the accelerator instead of
• 51:13
  Speaker 4: the break, and we're off again. But this roller coaster
• 51:17
  Speaker 4: is around and upward level.
• 51:19
  Speaker 1: It's not been on the level.
• 51:21
  Speaker 4: Each peak has been higher than the preceding peak, Each
• 51:25
  Speaker 4: trough has been higher than the preceding trough. In nineteen
• 51:30
  Speaker 4: sixty one, the lowest rate of inflation at that time
• 51:33
  Speaker 4: was one percent. In nineteen sixty seven, the next trough,
• 51:38
  Speaker 4: the lowest rate of inflation was two and a half
• 51:40
  Speaker 4: percent in nineteen seventy one, before mister Nixon introduced price
• 51:47
  Speaker 4: controls in order to control what was then supposed to
• 51:51
  Speaker 4: be the horrendous rate of inflation of.
• 51:53
  Speaker 1: Four and a half percent in that period.
• 51:57
  Speaker 4: The lowest rate was about four percent in nineteen seventy six.
• 52:02
  Speaker 4: Last year, when again we went through a recession to
• 52:05
  Speaker 4: stop the inflation. The lowest rate was six percent. It
• 52:09
  Speaker 4: was five percent. I'm sorry. So each bottom rate has
• 52:12
  Speaker 4: been hired in the preceding one. Similarly, each top rate
• 52:16
  Speaker 4: has been highed in the preceding. In nineteen sixty six,
• 52:20
  Speaker 4: we reached four percent. In nineteen sixty nine, we reached
• 52:24
  Speaker 4: six percent, in nineteen seventy four, we reached twelve percent.
• 52:30
  Speaker 4: In nineteen seventy nine. We will reach you fill in
• 52:33
  Speaker 4: the numbers. It's not a pleasant prospect. So we've been
• 52:39
  Speaker 4: on a roller coaster going up and up and up.
• 52:44
  Speaker 4: And we've been on that roller coaster because of the
• 52:46
  Speaker 4: problem that I've mentioned, that we get accustomed to our
• 52:50
  Speaker 4: to our addiction, and we need bigger doses to.
• 52:53
  Speaker 1: Get another high. If we look at the.
• 52:55
  Speaker 4: Period most if we look at the most recent period,
• 52:59
  Speaker 4: we've had the same situation again, from January nineteen seventy
• 53:06
  Speaker 4: four to January nineteen seventy five. The quantity of money
• 53:13
  Speaker 4: defined to include the currency in your pockets and all
• 53:18
  Speaker 4: deposits at commercial bank demanded time. What has come, in
• 53:23
  Speaker 4: the jargon of the literature to be known as M two.
• 53:28
  Speaker 4: I apologize for having given it that unlovely name, but
• 53:33
  Speaker 4: M two has grew in that year at six point
• 53:36
  Speaker 4: eight percent a year. That was a relatively low rate,
• 53:40
  Speaker 4: and it was that that was responsible for the tapering
• 53:42
  Speaker 4: off of inflation, so that by the end of seventy
• 53:47
  Speaker 4: six it was down to about a five percent.
• 53:49
  Speaker 1: On a year to year basis.
• 53:51
  Speaker 4: But in the period from January seventy five to now,
• 53:56
  Speaker 4: the money supply has been running at the annual rate
• 53:58
  Speaker 4: of ten percent a year. This quantity of money and
• 54:03
  Speaker 4: that poor tends an increase in the inflation rate. We
• 54:07
  Speaker 4: are now, we've hit the bottom and we're now on
• 54:09
  Speaker 4: the way up. We had a temporary bulge in January
• 54:14
  Speaker 4: February as a result of a very hard winter, but
• 54:17
  Speaker 4: the more fundamental phenomenon is that we're now on an upgrade.
• 54:21
  Speaker 4: We'll probably hit seven to nine percent next year, something
• 54:24
  Speaker 4: like that, and the base rate of inflation today is
• 54:27
  Speaker 4: somewhere in that level. The tragedy of this whole history
• 54:33
  Speaker 4: is that we have time and again four times now
• 54:39
  Speaker 4: paid the price of stopping an inflation and not gotten
• 54:43
  Speaker 4: the benefit. We've stepped on the brakes, we've slowed.
• 54:48
  Speaker 1: Down the monetary expension.
• 54:50
  Speaker 4: We've taken a recession, we've had unemployment, and then just
• 54:54
  Speaker 4: as inflation is starting to taper off, we throw the whole.
• 54:57
  Speaker 1: Ball game away, going to.
• 55:01
  Speaker 4: The races again with the printing press. Unfortunately, given these
• 55:08
  Speaker 4: mistakes at the present time, the options open to this
• 55:14
  Speaker 4: country are only bad options.
• 55:15
  Speaker 1: We don't have good options.
• 55:18
  Speaker 4: If you were sitting in at the Federal Reserve Board
• 55:20
  Speaker 4: and deciding on monetary policy, you mustn't suppose you'd have anything.
• 55:23
  Speaker 1: Good you could do. Whatever you do is bad.
• 55:27
  Speaker 4: Given the amount that you have now of money that
• 55:31
  Speaker 4: has now been pumped into the economy.
• 55:34
  Speaker 1: You have only two bad choices.
• 55:37
  Speaker 4: If you slow down drastically in order to try to
• 55:40
  Speaker 4: hold back inflation, the economy will experience a recession in
• 55:44
  Speaker 4: late seventy eight early seventy nine, and it may be
• 55:49
  Speaker 4: a fairly severe recess. Alternatively, you can say, well, we
• 55:53
  Speaker 4: can't do that, We've got to step on the gas.
• 55:56
  Speaker 1: Keep doing what we're doing now.
• 55:58
  Speaker 4: Then you are condemning the economy to going into another
• 56:02
  Speaker 4: period of double digit inflation.
• 56:05
  Speaker 1: Two years ago, there was a choice.
• 56:07
  Speaker 4: Having paid the price for slowing down the inflation, we
• 56:10
  Speaker 4: should have continued on a relatively slow rate of monetary
• 56:14
  Speaker 4: growth and then we would by now be well on
• 56:17
  Speaker 4: the way to cure for our inflation.
• 56:20
  Speaker 1: But we have not done so.
• 56:23
  Speaker 4: And as I say, I don't really blame the people
• 56:25
  Speaker 4: who are doing it. The real blame has to be
• 56:28
  Speaker 4: put on us, the America, of the citizens, the voters
• 56:32
  Speaker 4: of this country, for not telling our government what we
• 56:35
  Speaker 4: want them to do. And I am afraid that we
• 56:39
  Speaker 4: shall have to go through several more of these swings
• 56:44
  Speaker 4: in the roller coasters before the American people decide that
• 56:49
  Speaker 4: they have had enough of it and that it's time
• 56:51
  Speaker 4: to bring it to an end, that it's time to
• 56:55
  Speaker 4: send an unmistakable message to Washington. We want you to
• 56:58
  Speaker 4: stop the roller coaster.
• 57:00
  Speaker 1: When we do.
• 57:01
  Speaker 4: There is no technical difficulty about stopping it. Let me
• 57:08
  Speaker 4: emphasize it will not be costless to stop us, but
• 57:12
  Speaker 4: it will not be costless to continue what we're doing.
• 57:16
  Speaker 4: If I may conclude with a medical with my medical analogy,
• 57:19
  Speaker 4: if you are sick, it's very, very seldom that a
• 57:23
  Speaker 4: doctor can give you a cure which will enable you
• 57:25
  Speaker 4: to rise from your bed the next man, the next day,
• 57:28
  Speaker 4: a whole person completely unaffected by your illness. We have
• 57:34
  Speaker 4: a disease called inflation. Fortunately, our basic constitution is strong.
• 57:41
  Speaker 4: This is a strong, healthy country, although we've been doing
• 57:43
  Speaker 4: our best to make it unhealthy.
• 57:46
  Speaker 1: We've been doing our.
• 57:47
  Speaker 4: Best to take measures that will reduce our productivity. But
• 57:51
  Speaker 4: nonetheless we're still a pretty strong, healthy country. There's nothing
• 57:55
  Speaker 4: basically wrong with us. But we have been suffering from
• 57:59
  Speaker 4: a self impose disease of inflation. Sooner or later, I
• 58:03
  Speaker 4: am sure we will get up the will to cure it.
• 58:06
  Speaker 4: But we shall not cure it or continue it without
• 58:11
  Speaker 4: paying a price either way.
• 58:13
  Speaker 1: Thank you.
• 58:26
  Speaker 2: Okay, doctor Friedman, If you were advising President Carter, would
• 58:38
  Speaker 2: you advise him to work through the Federal Reserve or
• 58:41
  Speaker 2: through Congress to implement your recommendation.
• 58:45
  Speaker 4: Well, I'm not sure those are different, and I'm not
• 58:48
  Speaker 4: sure it's really President Carter to work through them. You know,
• 58:51
  Speaker 4: the president has a lot of influence, but very little power.
• 58:56
  Speaker 4: The President does not pass the appropriation bills. The President
• 59:00
  Speaker 4: has no direct control over the Federal Reserve, printing press.
• 59:04
  Speaker 4: The real source of power in this respect are the
• 59:08
  Speaker 4: Congress and the Federal Reserve together and jointly. And I
• 59:13
  Speaker 4: believe that's where the public at large has to bring
• 59:17
  Speaker 4: political pressure to bear to produce the right kind of policy.
• 59:22
  Speaker 2: So we need to change Congress to get off the treadmill.
• 59:24
  Speaker 1: No, we don't need to change Congress. Excuse me.
• 59:27
  Speaker 4: You know, people have a great misunderstanding about this. People
• 59:32
  Speaker 4: in Congress are in a business. They're trying to buy votes.
• 59:38
  Speaker 4: They're in the business of competing with one another to
• 59:41
  Speaker 4: get elected. The same congressman will vote for a different
• 59:44
  Speaker 4: thing if he thinks that's politically profitable. You don't have
• 59:48
  Speaker 4: to change Congress. People have a great misconception in this way.
• 59:52
  Speaker 4: They think the way you solve things is by electing
• 59:54
  Speaker 4: the right people. It's nice to elect the right people,
• 59:57
  Speaker 4: but that isn't the way you solve things. The way
• 1:00:00
  Speaker 4: you solve things is by making it politically profitable for
• 1:00:04
  Speaker 4: the wrong people to do the right things.
• 1:00:15
  Speaker 5: It said rather optimistically. I think that you have detected
• 1:00:19
  Speaker 5: a trend wherein the public will accept a slowing down
• 1:00:23
  Speaker 5: of the rolling of the printing presses. I confess that
• 1:00:26
  Speaker 5: that trend is invisible to me, and I wondered what
• 1:00:29
  Speaker 5: evidence of it you have seen.
• 1:00:31
  Speaker 4: I was really not referring directly to a trend to
• 1:00:33
  Speaker 4: slow the printing presses, but a more fundamental trend in
• 1:00:39
  Speaker 4: people's ideas and attitudes toward the role of government. Ten
• 1:00:45
  Speaker 4: years ago, twenty years ago, it was widely taken for
• 1:00:48
  Speaker 4: granted that there was hardly any problem the solution of
• 1:00:52
  Speaker 4: which did not reside in Washington, did not reside in
• 1:00:56
  Speaker 4: throwing more money.
• 1:00:57
  Speaker 1: At the problem. Very few people believe that anymore.
• 1:01:00
  Speaker 4: Today, people are greatly disillusioned about what government can accomplish
• 1:01:05
  Speaker 4: in the more particular area you're describing, worldwide, and not
• 1:01:10
  Speaker 4: merely in this country, the public at large has shifted
• 1:01:14
  Speaker 4: its major emphasis from unemployment to inflation. It is not
• 1:01:19
  Speaker 4: any longer politically popular to reduce unemployment by creating inflation.
• 1:01:25
  Speaker 4: If you take a case like Great Britain, which has
• 1:01:28
  Speaker 4: in some ways been on the forefront of this. Ten
• 1:01:31
  Speaker 4: twenty years ago, it would have been said that it
• 1:01:34
  Speaker 4: was absolutely politically intolerable to have had rates of unemployment
• 1:01:37
  Speaker 4: of the kind that Britain is in. But today the
• 1:01:41
  Speaker 4: Labor government in Britain finds it popular, politically popular, politically
• 1:01:45
  Speaker 4: profitable to put its emphasis on reducing the rate of
• 1:01:49
  Speaker 4: inflation in Britain. Last September at the Labor Party Conference,
• 1:01:54
  Speaker 4: Prime Minister Callahan found it politically profitable to say we
• 1:01:59
  Speaker 4: used to think that if you had unemployment in a recession,
• 1:02:03
  Speaker 4: the way to get out of it was by spending.
• 1:02:05
  Speaker 1: More money or cutting taxes.
• 1:02:07
  Speaker 4: But if that was once a solution, it is no
• 1:02:10
  Speaker 4: longer an option open to us.
• 1:02:11
  Speaker 1: I'm not quoting precisely.
• 1:02:12
  Speaker 4: But the sense of it, he said, because we have
• 1:02:15
  Speaker 4: learned that that only works temporarily, but the ultimate result
• 1:02:19
  Speaker 4: is more inflation. So you have, in Britain and in
• 1:02:23
  Speaker 4: other countries around the world, a willingness on the part
• 1:02:27
  Speaker 4: of the population at large two to stand for measures
• 1:02:33
  Speaker 4: directed at reducing inflation.
• 1:02:35
  Speaker 1: The same thing is true in this country.
• 1:02:38
  Speaker 4: Every public opinion poll has shown that inflation is a
• 1:02:42
  Speaker 4: problem that the public at large is more concerned about
• 1:02:44
  Speaker 4: than the problem of unemployment.
• 1:02:46
  Speaker 1: It will not be you see.
• 1:02:48
  Speaker 4: I think President Carter faces a real dilemma at the
• 1:02:51
  Speaker 4: moment with respect to his own election prospects. In nineteen
• 1:02:55
  Speaker 4: eighty He cannot control I said before. He has much
• 1:03:00
  Speaker 4: influence but little power. He cannot really control it. But
• 1:03:03
  Speaker 4: suppose he could, what should he do. He's facing a dilemma.
• 1:03:08
  Speaker 4: Ten years ago, the eye answer would have been obvious.
• 1:03:10
  Speaker 4: Step on the gas print money create a great period
• 1:03:15
  Speaker 4: of prosperity by nineteen eighty, but with double digit inflation,
• 1:03:19
  Speaker 4: the double digit inflation will do him more political harm
• 1:03:22
  Speaker 4: then the boom will do him good. So I think
• 1:03:24
  Speaker 4: there is a very strongly detectable change in the attitude
• 1:03:28
  Speaker 4: of the public at large. On the one hand, they
• 1:03:33
  Speaker 4: are more inclined to attribute the inflation the responsibility for
• 1:03:36
  Speaker 4: inflation to government, to be more conscious of it. And
• 1:03:39
  Speaker 4: then the other they have less rosy views about the
• 1:03:45
  Speaker 4: power of government to cure all ills. Thank you very much,
• 1:03:54
  Speaker 4: let's have some more people come up here to increase
• 1:03:57
  Speaker 4: our inventory.
• 1:04:00
  Speaker 6: Professor Friedman, for the federal government's ability and willingness to
• 1:04:04
  Speaker 6: produce unlimited amounts of money, what are the implications for
• 1:04:08
  Speaker 6: the concept of a vital local and state government and
• 1:04:12
  Speaker 6: the broader question implications for the concept of federalism.
• 1:04:16
  Speaker 4: Well, obviously, one of the trends that has been reducing
• 1:04:21
  Speaker 4: the viability of local and state government has been a
• 1:04:23
  Speaker 4: trend towards centralization, a trend toward enhancing the power and
• 1:04:27
  Speaker 4: the strength of Washington at the expense of the state
• 1:04:31
  Speaker 4: and a city hall. And no doubt the fact that
• 1:04:35
  Speaker 4: Washington present possesses a printing press and the city Hall
• 1:04:39
  Speaker 4: and the State House do not has been a factor
• 1:04:42
  Speaker 4: that has been contributing to them. But again we come
• 1:04:45
  Speaker 4: back to the same question that has come up before.
• 1:04:49
  Speaker 4: Will that continue? Is that necessary? Is it inevitable that
• 1:04:54
  Speaker 4: the federal government will grow in power?
• 1:04:56
  Speaker 1: If it is.
• 1:04:57
  Speaker 4: If it does, then I agree with you we are headed.
• 1:05:01
  Speaker 4: We would be headed toward a unified, centralized country. I
• 1:05:04
  Speaker 4: think one of our great strengths is a country is
• 1:05:07
  Speaker 4: precisely the federal system, precisely that we have a distribution
• 1:05:11
  Speaker 4: of power that we do have states which which attach
• 1:05:16
  Speaker 4: loyalties to themselves, which have independent power. So I think
• 1:05:20
  Speaker 4: there is a trend in your direction, but I don't
• 1:05:23
  Speaker 4: think it necessarily needs to continue or necessarily will continue
• 1:05:28
  Speaker 4: a number.
• 1:05:28
  Speaker 6: Of a government agency. Do we do ourselves a disservice
• 1:05:33
  Speaker 6: by quickly pursuing federal grants and funding to meet our
• 1:05:38
  Speaker 6: needs when often those grants are not our priorities, but
• 1:05:42
  Speaker 6: just where we can get matching money.
• 1:05:44
  Speaker 4: Well, you have a dilemma there, given the program, Given
• 1:05:49
  Speaker 4: that there is a federal program, I can't blame you
• 1:05:51
  Speaker 4: for trying to go get it. And yet I think
• 1:05:54
  Speaker 4: it sooner or later the public will wake up to
• 1:05:57
  Speaker 4: the idea that they really aren't doing themselves any favor
• 1:06:01
  Speaker 4: by sending a dollar to Washington and getting getting eighty
• 1:06:04
  Speaker 4: cents back.
• 1:06:07
  Speaker 1: That's been the experience what we have had.
• 1:06:10
  Speaker 4: It's it's a it's it's a great defect of the centralization.
• 1:06:16
  Speaker 4: And it's very hard to understand why people allow themselves
• 1:06:19
  Speaker 4: to be fooled. But somehow they have the impression that
• 1:06:23
  Speaker 4: if the money comes from Washington, somebody else is going
• 1:06:25
  Speaker 4: to pay for it. But of course it's a two
• 1:06:27
  Speaker 4: way trip, and there is a discount taken off in
• 1:06:30
  Speaker 4: Washington as it turns around.
• 1:06:34
  Speaker 6: I don't know if I can ask one more question,
• 1:06:36
  Speaker 6: but since I deal with high school students and I'm
• 1:06:39
  Speaker 6: concerned about economical education in our schools, what is your
• 1:06:43
  Speaker 6: barometer as you talk to young people? What is their
• 1:06:47
  Speaker 6: projection of the business economy. I deal with many people,
• 1:06:51
  Speaker 6: young people who go into government thinking that that's where
• 1:06:54
  Speaker 6: the jobs are, and that concerns me.
• 1:06:56
  Speaker 1: What is your fortult.
• 1:06:59
  Speaker 4: Again, that is not preordained. We're masters of our own destiny.
• 1:07:05
  Speaker 4: That depends what we as a people decide. If we
• 1:07:08
  Speaker 4: as a people decide we want to continue on the
• 1:07:10
  Speaker 4: path we've been going, on which I hope we won't.
• 1:07:13
  Speaker 1: But if we do, why then.
• 1:07:15
  Speaker 4: Your youngsters are better off going into Washington. They will
• 1:07:18
  Speaker 4: get better salaries. Do you know, do you people know
• 1:07:22
  Speaker 4: what the highest income average income county in the United
• 1:07:24
  Speaker 4: States is. It's not San Diego County, it's not even
• 1:07:31
  Speaker 4: Marin County. It's not Westchester, it's not any of those
• 1:07:36
  Speaker 4: fancy Connecticut counties. It's Fairfax County in Virginia, the bedroom
• 1:07:40
  Speaker 4: of the Washington civil servants. That's the highest average income
• 1:07:45
  Speaker 4: county in the country. So that you would be telling
• 1:07:48
  Speaker 4: the students right if you said to them, if you
• 1:07:50
  Speaker 4: want to make an.
• 1:07:50
  Speaker 1: Income, go to work for Washington.
• 1:07:53
  Speaker 4: But it's up to us as citizens to make that
• 1:07:56
  Speaker 4: no longer true. Thank you, yes sir, yes, ma'am, all right.
• 1:08:03
  Speaker 7: Recently we've heard that the inflation currently experienced in this
• 1:08:08
  Speaker 7: country won't respond to monetary restraint because it's cost push
• 1:08:12
  Speaker 7: inflation and not demand pull. What response would you have
• 1:08:17
  Speaker 7: to that analysis, if any.
• 1:08:20
  Speaker 4: It's another example of the people who produce the inflation
• 1:08:23
  Speaker 4: finding this, trying to find scapegoats for their own deficiencies.
• 1:08:29
  Speaker 4: Of course, the inflation will respond to monetary restraint. There
• 1:08:33
  Speaker 4: is no such thing as cost push inflation, except in
• 1:08:37
  Speaker 4: the form of the delayed effect of monetary inflation. If
• 1:08:42
  Speaker 4: you have a monetary inflation that starts to push up prices,
• 1:08:45
  Speaker 4: it tends to hit retail and wholesale prices first, the
• 1:08:48
  Speaker 4: prices you and I pay. It's only later that it
• 1:08:51
  Speaker 4: works its way through costs. But then costs fall behind prices,
• 1:08:57
  Speaker 4: and there's a makeup period, and during that period you
• 1:08:59
  Speaker 4: have what looks like cost push inflation. But there has
• 1:09:03
  Speaker 4: never been an inflation in history that didn't respond to
• 1:09:06
  Speaker 4: monetary restraint. If you look at American experience and ponded
• 1:09:09
  Speaker 4: a monetary restraint, if you take that roller coaster I
• 1:09:12
  Speaker 4: was telling you on each occasion the slow down in
• 1:09:16
  Speaker 4: the rate of inflation was preceded by a slower rate
• 1:09:19
  Speaker 4: of monetary growth, then you have much more dramatic examples
• 1:09:23
  Speaker 4: of that. Most dramatic example from American history of how
• 1:09:29
  Speaker 4: inflation responds to monetary restraint was one that was once
• 1:09:32
  Speaker 4: dug up by a student of mine when he was
• 1:09:34
  Speaker 4: writing a dissertation on inflation in the Confederacy during the
• 1:09:38
  Speaker 4: Civil War and in the later parts of that war.
• 1:09:42
  Speaker 1: You know, the South financed.
• 1:09:44
  Speaker 4: The war almost entirely by printing press money, and the
• 1:09:47
  Speaker 4: rate of inflation during the Civil War in the South,
• 1:09:50
  Speaker 4: I don't know, got up to something like four or
• 1:09:52
  Speaker 4: five percent a month or more. But at one point
• 1:09:56
  Speaker 4: in the later part of the war, the Northern Army
• 1:09:58
  Speaker 4: overran the place in the South where they were printing money,
• 1:10:03
  Speaker 4: and for two weeks the printing presses couldn't operate, and
• 1:10:06
  Speaker 4: lo and behold, within two weeks the inflation stopped. And
• 1:10:11
  Speaker 4: you've got many, many examples like that, so that what
• 1:10:15
  Speaker 4: you can say to people is they're kidding themselves.
• 1:10:18
  Speaker 8: Yes, sir, I've been I've been rereading James Buchanan on
• 1:10:24
  Speaker 8: the monetization of the debt and his conclusion that we
• 1:10:29
  Speaker 8: can't possibly reduce the debt because of the depression effects
• 1:10:32
  Speaker 8: that would result. In other words, we're stuck with it forever.
• 1:10:36
  Speaker 8: What's your opinions on that?
• 1:10:38
  Speaker 4: Well, which debt are you speaking of now? Are you
• 1:10:40
  Speaker 4: speaking of the funded debt, the bonds?
• 1:10:42
  Speaker 1: The fund of debt is the fund of debts. We've
• 1:10:44
  Speaker 1: been reducing it every year.
• 1:10:47
  Speaker 4: It's much smaller now in real turn, divided by prices
• 1:10:52
  Speaker 4: or divided by income, than it was right after World
• 1:10:54
  Speaker 4: War two. And how have we been reducing the debt
• 1:10:57
  Speaker 4: by monetizing it, by paying it all through inflation. Now
• 1:11:02
  Speaker 4: when you come to the unfunded debt, this three trillion
• 1:11:05
  Speaker 4: or more of obligations under social security and other programs,
• 1:11:10
  Speaker 4: that's a much more difficult task.
• 1:11:12
  Speaker 1: I think, I may say, if.
• 1:11:13
  Speaker 4: You'll pardon me for a digression here for a moment,
• 1:11:16
  Speaker 4: that those fiscal conservatives who keep their eye on balancing
• 1:11:20
  Speaker 4: the budget and on the debtor and making a great mistake,
• 1:11:24
  Speaker 4: and in fact that they have been the handmaidens of
• 1:11:27
  Speaker 4: the big spenders. What has happened over and over again
• 1:11:32
  Speaker 4: is that the big spenders get off and start spending money.
• 1:11:36
  Speaker 4: This produces a deficit. The fiscal conservatives crotch their head
• 1:11:39
  Speaker 4: and say, my god, we got to do something about
• 1:11:41
  Speaker 4: that deficit. So they go to work and raise the
• 1:11:44
  Speaker 4: taxes to pay for the deficit. And as soon as
• 1:11:47
  Speaker 4: they get the budget balanced again, the big spenders are
• 1:11:49
  Speaker 4: off for the next lap. And the so called fiscal
• 1:11:52
  Speaker 4: conservatives that turned out to do the dirty work.
• 1:11:56
  Speaker 1: For the big spenders.
• 1:11:58
  Speaker 4: As I said before, keep your eye on one thing,
• 1:12:01
  Speaker 4: and one thing only, how much government is spending, because
• 1:12:04
  Speaker 4: that's the true tax. Every budget is balanced. There is
• 1:12:08
  Speaker 4: no such thing as an unbalanced federal budget. You're paying
• 1:12:12
  Speaker 4: for it if you're not paying for it through it
• 1:12:15
  Speaker 4: in the form of explicit taxes, you're paying for it indirectly,
• 1:12:18
  Speaker 4: in the form of inflation or in the form of borrowing.
• 1:12:22
  Speaker 4: The thing you should keep your eye on is what
• 1:12:24
  Speaker 4: government spends, and the real problem is to hold down
• 1:12:28
  Speaker 4: government spending as a fraction of our end.
• 1:12:32
  Speaker 1: And if you do that, you can stop worrying about
• 1:12:34
  Speaker 1: the debt.
• 1:12:35
  Speaker 9: I have but two very different questions. But first, I
• 1:12:37
  Speaker 9: wonder if you'd come on an assertion with regard to
• 1:12:40
  Speaker 9: your theory on the political process. It seems to me
• 1:12:44
  Speaker 9: that the incumbents who disagree with you and with me
• 1:12:46
  Speaker 9: are one step ahead of us, and they're so carefully
• 1:12:49
  Speaker 9: insulating themselves in the political process by giving themselves vast
• 1:12:53
  Speaker 9: purposes and benefits of incumbency. So we have people voting
• 1:12:57
  Speaker 9: for their reelection not on the basis of their policy
• 1:13:00
  Speaker 9: or their issue petition to their votes, but whether or
• 1:13:02
  Speaker 9: not they're being serviced in their district, which is a
• 1:13:04
  Speaker 9: vastly different situation than was years ago.
• 1:13:08
  Speaker 1: Well, that may well be true.
• 1:13:09
  Speaker 4: I do believe that I agree with you, that incumbency
• 1:13:13
  Speaker 4: is an enormous advantage these days, that the drive of
• 1:13:17
  Speaker 4: course for governmental financing of elections is really a drive
• 1:13:22
  Speaker 4: to strengthen the power of incumbents and make it more
• 1:13:25
  Speaker 4: difficult for anybody to challenge them. That the election, what
• 1:13:29
  Speaker 4: was the bill that was passed about campaign financing limiting
• 1:13:33
  Speaker 4: private funds was also a major step toward increasing the
• 1:13:37
  Speaker 4: advantages of incumbents. But I nonetheless believe that if the
• 1:13:44
  Speaker 4: public at large feels strongly enough about a subject, Congress
• 1:13:47
  Speaker 4: will listen and act in accordance with them.
• 1:13:50
  Speaker 9: And aren't some of the same people feel strongly about this,
• 1:13:53
  Speaker 9: the same people who are so skinnical, cynical and skeptical
• 1:13:56
  Speaker 9: the political process, therefore taking themselves out of the voting process.
• 1:14:00
  Speaker 4: I'm not sure whom you're referring to it this day,
• 1:14:02
  Speaker 4: the people who don't vote, well.
• 1:14:04
  Speaker 9: I'm talking about we see more and more people becoming disenchanted,
• 1:14:07
  Speaker 9: who believe strongly in the free market, who are just
• 1:14:09
  Speaker 9: giving up no matter who I vote for, the policies continue,
• 1:14:12
  Speaker 9: and as they take themselves out of the political process,
• 1:14:15
  Speaker 9: were left with a proportionally large well.
• 1:14:17
  Speaker 4: But there's more than one way to make themselves effective.
• 1:14:20
  Speaker 4: I understand your point, and I would say that the
• 1:14:24
  Speaker 4: most encouraging move I've seen around is one which started
• 1:14:29
  Speaker 4: in the state, and that is a move to take
• 1:14:33
  Speaker 4: the total budget out of the hands of the elected
• 1:14:35
  Speaker 4: representatives and determine it through a constitutional amendment. That was
• 1:14:39
  Speaker 4: a proposition one fight that was started to hear five
• 1:14:42
  Speaker 4: years ago, unfortunately was defeated. Yeah, but I am very
• 1:14:50
  Speaker 4: much encouraged by the strength which the movement for such
• 1:14:54
  Speaker 4: amendments around the country and at the federal level is
• 1:14:59
  Speaker 4: a the strengths which it is gaining. As you know,
• 1:15:03
  Speaker 4: last year, Michigan had a similar proposition in its ballot
• 1:15:07
  Speaker 4: and it was defeated too. It's very interesting to compare
• 1:15:10
  Speaker 4: the propaganda that was put out in California and Michigan.
• 1:15:13
  Speaker 1: Five years apart on the same proposition.
• 1:15:16
  Speaker 4: It was the same propaganda, financed and fostered by the
• 1:15:19
  Speaker 4: same groups, primarily the State Education Association, making the same
• 1:15:26
  Speaker 4: kind of misstatements.
• 1:15:27
  Speaker 1: About the.
• 1:15:31
  Speaker 4: About the proposition, and in both cases with considerable success.
• 1:15:37
  Speaker 1: But in both those states and in a.
• 1:15:39
  Speaker 4: Considerable number of others, there is a grassroots movement that
• 1:15:42
  Speaker 4: is growing and that I think we are going to
• 1:15:45
  Speaker 4: see in the next four or five years at least
• 1:15:47
  Speaker 4: a half a dozen states adopt tax limitation or spending
• 1:15:51
  Speaker 4: limitation amendments of that kind. In addition, on the federal level,
• 1:15:56
  Speaker 4: the Southern Governor's Conference a few years ago had a
• 1:15:59
  Speaker 4: task force which drew up a federal amendment to limit
• 1:16:03
  Speaker 4: federal spending. That task force was headed by headed by
• 1:16:07
  Speaker 4: Governor James Edwards.
• 1:16:08
  Speaker 1: Of South Carolina.
• 1:16:10
  Speaker 4: Unless I am mistaken that Southern Governor's Conference has endorsed
• 1:16:14
  Speaker 4: that proposal, there are various Congressmen and senators who have
• 1:16:20
  Speaker 4: introduced similar budget by similar budget limitation amendments in Congress.
• 1:16:25
  Speaker 4: So I think that there is a strong chance that
• 1:16:28
  Speaker 4: we have a movement underway and which will give people
• 1:16:33
  Speaker 4: something to vote for that they think will be effective
• 1:16:36
  Speaker 4: over and beyond voting for particular individuals.
• 1:16:40
  Speaker 10: Doctor Friedman, part of the twofold cure you suggested tonight
• 1:16:44
  Speaker 10: would be a reduction of government spending. What areas of
• 1:16:47
  Speaker 10: government spending would you suggest are most amenable to reduction
• 1:16:50
  Speaker 10: every area.
• 1:16:52
  Speaker 4: I think that the only way to reduce government spending
• 1:16:55
  Speaker 4: is across the board. Cut every single appropriation first year
• 1:17:00
  Speaker 4: by ten percent, the next year by.
• 1:17:02
  Speaker 1: Twenty percent and just keep going. You know, why do
• 1:17:06
  Speaker 1: you want to choose?
• 1:17:07
  Speaker 10: You know the reason I asked that is it seems
• 1:17:09
  Speaker 10: to me that if hire unemployment is a short term
• 1:17:12
  Speaker 10: side effect of your inflation cure, then welfare costs are
• 1:17:15
  Speaker 10: going to go up as a result.
• 1:17:17
  Speaker 1: Well, that depends on you.
• 1:17:18
  Speaker 4: See, the problem you're raising is a following money. Every
• 1:17:22
  Speaker 4: one of us would like to reform a program. But
• 1:17:26
  Speaker 4: if you try to achieve a reduction in spending via reform,
• 1:17:30
  Speaker 4: you won't get it. But if you first achieve a
• 1:17:33
  Speaker 4: reduction in spending through across the board cuts, that will
• 1:17:37
  Speaker 4: force you to engage in the kind of reform you're
• 1:17:39
  Speaker 4: talking about. And I quite agree with you. I don't
• 1:17:43
  Speaker 4: think we need to spend more money on welfare, not
• 1:17:45
  Speaker 4: at all. But if we had a more sensible welfare system,
• 1:17:48
  Speaker 4: we would spend less and yet give help where it's
• 1:17:51
  Speaker 4: really needed. You know, the welfare system today does not
• 1:17:54
  Speaker 4: help the people who really need it. If you take
• 1:17:57
  Speaker 4: the total amount of money which the government is now
• 1:18:01
  Speaker 4: spending on programs labeled as poverty programs to help the
• 1:18:04
  Speaker 4: poort and calculate how much that amounts to each person
• 1:18:07
  Speaker 4: who is designated as poor. It turns out that if
• 1:18:10
  Speaker 4: they were getting it, they would be among the rich
• 1:18:12
  Speaker 4: people in this country. But of course they aren't getting it.
• 1:18:17
  Speaker 4: It's going to lots.
• 1:18:18
  Speaker 1: Of other people.
• 1:18:19
  Speaker 4: So I agree with you that a temporary increase in unemployment,
• 1:18:25
  Speaker 4: as in the process of curing inflation, might very well
• 1:18:29
  Speaker 4: cause an increase in some kinds of expenditures on the
• 1:18:33
  Speaker 4: welfare side, but I think that that is not inconsistent
• 1:18:37
  Speaker 4: with cutting expenditures in general.
• 1:18:40
  Speaker 10: Also, what is your opinion of consumer protection legislation as
• 1:18:43
  Speaker 10: it affects economic freedom.
• 1:18:45
  Speaker 4: Well, most consumer protection legislation is not consumer protection legislation.
• 1:18:50
  Speaker 4: It's the enacting into the laws of the prejudices of
• 1:18:54
  Speaker 4: a small group of people who have organized themselves into
• 1:18:57
  Speaker 4: an effective lobbying group. Is the consumer really being protected
• 1:19:03
  Speaker 4: by having somebody else decide for him whether he may
• 1:19:05
  Speaker 4: use sachrin or not. He's not being protected, He's being hurt.
• 1:19:10
  Speaker 1: You know.
• 1:19:13
  Speaker 4: The most anti consumer measures on the books that have
• 1:19:17
  Speaker 4: been taken in recent months have been the imposition of
• 1:19:23
  Speaker 4: quotas or their equivalent voluntary restraints on the imports of
• 1:19:27
  Speaker 4: TV from Japan and of shoes from I think it
• 1:19:31
  Speaker 4: was Taiwan did you hear any of these consumer protection
• 1:19:36
  Speaker 4: agencies get up and protest about that where were they
• 1:19:39
  Speaker 4: when we really needed them? I think that there is
• 1:19:43
  Speaker 4: the most effective protection the consumer can get his free competition.
• 1:19:48
  Speaker 4: If you really want to have a pro consumer protection move,
• 1:19:52
  Speaker 4: then you ought to join yourself with other people in
• 1:19:56
  Speaker 4: promoting free trade.
• 1:20:04
  Speaker 3: I have two questions. The first is how detrimental do
• 1:20:07
  Speaker 3: you believe the significant increase in petroleum products has been
• 1:20:10
  Speaker 3: to the rates of inflation throughout the world.
• 1:20:12
  Speaker 1: Not at all.
• 1:20:14
  Speaker 4: The increase in the petroleum products has been a negligible
• 1:20:16
  Speaker 4: cause of higher rates of inflation. It's been an excuse
• 1:20:21
  Speaker 4: for governments that have produced the inflation. After all, if
• 1:20:24
  Speaker 4: petroleum prices are a cause of the basic cause of inflation,
• 1:20:27
  Speaker 4: how can you explain the very different impacts on different countries.
• 1:20:32
  Speaker 4: Here are Japan and Germany. They both import almost all
• 1:20:35
  Speaker 4: their oile. It should hit them alike. Germany went through
• 1:20:39
  Speaker 4: with a maximum rate of inflation around six percent. Japan
• 1:20:42
  Speaker 4: got up to thirty percent. What happened is that the
• 1:20:46
  Speaker 4: not the increase in petroleum prices, but the OPEC cartel
• 1:20:50
  Speaker 4: and the reduction and availability of petroleum has made has
• 1:20:54
  Speaker 4: has produced a transfer of wealth from the rest of
• 1:20:57
  Speaker 4: the world to the Arab countries. It's made us poor
• 1:21:00
  Speaker 4: to a very small extent, insofar as it's made as poor.
• 1:21:04
  Speaker 4: It's had a slight effect on making prices higher, but
• 1:21:07
  Speaker 4: it has had a very trivial effect on the rates
• 1:21:10
  Speaker 4: of inflation.
• 1:21:11
  Speaker 3: The second question is what do you believe the probability
• 1:21:14
  Speaker 3: might be of the removal of the capital gains tax
• 1:21:16
  Speaker 3: as well as the removal of the double taxation on dividends.
• 1:21:21
  Speaker 4: Well, I think there is a possibility that you will
• 1:21:24
  Speaker 4: move in both those directions, but I think it's very
• 1:21:26
  Speaker 4: dubious that you will go all the way in either case.
• 1:21:30
  Speaker 4: Thank you, I may say, I think the more important
• 1:21:35
  Speaker 4: point about capital gains is not so much about whether
• 1:21:38
  Speaker 4: it's removed, but about whether the base for calculating capital
• 1:21:42
  Speaker 4: gains is indexed. That's the really important question. It would
• 1:21:46
  Speaker 4: be well worth paying the price of getting rid of
• 1:21:49
  Speaker 4: the special treatment of capital gains if you could get
• 1:21:52
  Speaker 4: the base of capital gains index because the problem with
• 1:21:56
  Speaker 4: capital gains taxation now is you're not taxing real capital gains,
• 1:22:00
  Speaker 4: taxing purely paper gains, which simply reflect inflation. That's part
• 1:22:06
  Speaker 4: of the whole problem of tax indexation.
• 1:22:11
  Speaker 11: Doctor Friedman, one more question about tax reform.
• 1:22:13
  Speaker 4: And one more question is right, because they're coming to
• 1:22:15
  Speaker 4: the end of our time, We've got one more gentleman there,
• 1:22:17
  Speaker 4: and we'll try to handle both of these.
• 1:22:19
  Speaker 11: Yes, Congressman Kemp of New York has a proposal for
• 1:22:24
  Speaker 11: a permanent tax cut. I don't know how much, partially
• 1:22:27
  Speaker 11: in emulation of President Kennedy in nineteen sixty three, I
• 1:22:31
  Speaker 11: believe the idea being that if you cut taxes in
• 1:22:34
  Speaker 11: times of a slow down, you'll pick up the economy
• 1:22:37
  Speaker 11: and perhaps even produce more revenue for the government. Now,
• 1:22:41
  Speaker 11: given your skepticism about tax reform, is this perhaps one
• 1:22:44
  Speaker 11: proposal you might endorse.
• 1:22:46
  Speaker 4: Well, I have long ago concluded that I am in
• 1:22:49
  Speaker 4: favor of reducing taxes at any time, under any circumstances,
• 1:22:52
  Speaker 4: for any excuse, that that's the only effective way to
• 1:22:58
  Speaker 4: exert pressure on go and spending. Congress will spend whatever
• 1:23:03
  Speaker 4: the tax system will yield, plus a good deal more.
• 1:23:08
  Speaker 4: But that plus a good deal more is not infinitely elastic.
• 1:23:10
  Speaker 4: There is some pressure on them when it gets large,
• 1:23:13
  Speaker 4: and therefore the only effective way, in my opinion, other
• 1:23:17
  Speaker 4: than these kinds of constitutional amendments I was talking about before.
• 1:23:20
  Speaker 4: Of bringing down spending is to reduce taxes. So as
• 1:23:23
  Speaker 4: I say, I don't go along with mister Kemp's reasons,
• 1:23:27
  Speaker 4: but I'm in favor of cutting taxes.
• 1:23:31
  Speaker 8: Yes, sir, I am associated with the banking system and
• 1:23:34
  Speaker 8: I do.
• 1:23:35
  Speaker 1: I won't hold that against you.
• 1:23:36
  Speaker 8: I do have a line of credit and I can
• 1:23:39
  Speaker 8: go This relates to m too. I could go in
• 1:23:42
  Speaker 8: tomorrow and sign a piece of paper. The bank will
• 1:23:44
  Speaker 8: write out a deposit ticket. Thereby the money supply has increased.
• 1:23:48
  Speaker 8: How do you stop that?
• 1:23:50
  Speaker 4: Oh? No, the bank will only be able to do
• 1:23:52
  Speaker 4: that if you can find the reserves. And for the
• 1:23:54
  Speaker 4: banking system as a whole, one bank can always get
• 1:23:57
  Speaker 4: reserved from another bank. But the great mistake that everybody
• 1:24:01
  Speaker 4: makes about many different items, it's not only this, is
• 1:24:05
  Speaker 4: to confuse what's true for the individual with what's true
• 1:24:08
  Speaker 4: for the society as a whole. The most fascinating thing
• 1:24:11
  Speaker 4: about economics the reason you know, in a way, it's
• 1:24:14
  Speaker 4: always an interesting thing about economics. It's the most trivial
• 1:24:17
  Speaker 4: subject in the world, and yet so many people misunderstanding.
• 1:24:22
  Speaker 1: It's so hard for people to understand it. Why I believe.
• 1:24:25
  Speaker 4: A major reason is because almost every interesting economic proposition
• 1:24:30
  Speaker 4: has the following characteristic. What's true for the individual is
• 1:24:34
  Speaker 4: the opposite of what's true.
• 1:24:35
  Speaker 1: For everybody together.
• 1:24:37
  Speaker 4: It looks to you as if you can decide how
• 1:24:40
  Speaker 4: many pieces of paper you carry in your pocket, how
• 1:24:42
  Speaker 4: much cash you have. It looks to you as if
• 1:24:45
  Speaker 4: you can decide how much deposits you have.
• 1:24:47
  Speaker 1: It's true you can, but.
• 1:24:49
  Speaker 4: To everybody together, it's a game of musical chairs. The
• 1:24:53
  Speaker 4: Federal Reserve determines a total quantity of money, and then
• 1:24:56
  Speaker 4: it's shared out among the people. Your bank can increase
• 1:25:00
  Speaker 4: its deposits by attracting reserves away from another bank, but
• 1:25:04
  Speaker 4: that puts pressure on another bank to contract the total
• 1:25:07
  Speaker 4: amount of reserves will set a limit to them. Let
• 1:25:10
  Speaker 4: me give you some other examples. It looks to you,
• 1:25:13
  Speaker 4: it looks to It looks to you when you go
• 1:25:17
  Speaker 4: to the store and you see an object offered for sale,
• 1:25:22
  Speaker 4: as if the price is fixed and the amount available
• 1:25:25
  Speaker 4: to you for you to buy is indefinite. If you
• 1:25:27
  Speaker 4: want to buy two pairs of shoes at that price,
• 1:25:29
  Speaker 4: you can buy two pairs, three pairs, You can buy
• 1:25:31
  Speaker 4: three pairs. To the whole country together. There are certain
• 1:25:34
  Speaker 4: number of pairs of shoes available at the moment, and
• 1:25:38
  Speaker 4: the price is what's free to move up or down
• 1:25:41
  Speaker 4: to equate the number of pairs of shoes people want
• 1:25:43
  Speaker 4: to buy to the pair available. You try this out,
• 1:25:46
  Speaker 4: and almost every proposition, what's true for the country as
• 1:25:50
  Speaker 4: a whole is the opposite of what's true for the individual,
• 1:25:52
  Speaker 4: and that's equally true with the proposition you're presenting.
• 1:25:57
  Speaker 8: Depends on who gets there.
• 1:25:58
  Speaker 4: Yes, it does does very much, so thank you.