Latest / The Capitalism and Freedom in the Twenty-First Century Podcast / Monetary History, Bretton Woods, and Banking Crises

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Monetary History, Bretton Woods, and Banking Crises · The Capitalism and Freedom in the Twenty-First Century Podcast

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>> John Hartley: This is the Capitalism and Freedom of the 21st Century podcast,
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where we talk about economics, markets and public policy.
0:48
I'm Jon Hartley, your host.
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Today, I'm joined by Michael Bordo, a monetary historian,
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professor of economics at Rutgers University.
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Distinguished Visiting Fellow at the Hoover Institution, and
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a research associate at the National Bureau of Economic Research, welcome.
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>> Michael Bordo: Thank you.
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>> John Hartley: Now, Michael,
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I wanna first get into how you got interested in economics.
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You grew up in Montreal, and you also attended McGill.
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And then you went to the University of Chicago and studied under
1:20
Milton Friedman for your PhD and had Friedman as your dissertation advisor.
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And you were also at Chicago during a time when it was blessed
1:30
with many international economists,
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many very famous international Canadian monetary economists.
1:38
Like Harry Johnson, Bob Mundell, who would win a Nobel Prize later,
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and very famous for Mundell-Fleming, the trilemma.
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I'm curious, how did you get interested in monetary economics to begin with,
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and how did you end up at Chicago?
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>> Michael Bordo: Okay, well, I studied economics at McGill.
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In fact, I did an Honors Economics and Political Science.
2:02
And it is a good university, it was even a better university way back when.
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And they were very strong in economics, I took this honors program.
2:14
So there were small classes and really smart people and I really got into it.
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But what got me into economic history and
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monetary history was the first year we were there, we had to take a course,
2:28
an introductory course, in economics, but it was economic history, and
2:33
it was taught by F Cyril James, who was the principal of the university.
2:38
And he was a famous British economic historian who
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was an expert on the Great Depression and
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specifically the Chicago banking panic of 1932, okay.
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And he gave this incredible course, and he ended it with the story of what happened
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in 1931 when the entire international financial system collapsed.
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And so I was hooked.
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And then I went into economics, I did micro, macro, all that stuff, right?
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And then I went to LSE, the London School of Economics.
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Back then in the 60s, Canadians, a lot of Canadians went to England.
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That was part of the deal.
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So I went there, I had great advisors and great people.
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I worked with Bill Phillips, Lord Robbins, okay, and a number of other people,
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Ed Mishan, who was a former student of Milton Friedman.
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And so I had a great time at LSE, but I realized I needed to learn some more,
3:38
that I didn't really have that strong background.
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And so I was advised by Mishan, my advisor, to go to Chicago, and I applied.
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And Harry Johnson, I got in touch with Harry Johnson, who was at Chicago
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through the Mishan connection, and he just opened up all the doors for me.
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He got funding, and I went from LSE to Chicago.
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And I arrived there, and I was assigned a student advisor, and it's Milton Friedman.
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I walked into his office, he said, wow, you've got a great background,
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McGill, LSE, dot, and I just sort of got hooked.
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I took his courses.
4:21
>> John Hartley: What year would this have been?
4:23
>> Michael Bordo: This was 1965, so I took Friedman's courses.
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I also did economic history with Robert Fogel, and I really liked him.
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And I did international with Harry, international trade, and Bob Mundell.
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And Mundell, he just arrived the same time as me, and he was ten years older.
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And I took his first course, and it was incredible.
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I loved it, okay?
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He was just really, really, really hot, okay?
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And so I did very well in his course, I took all his courses.
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Had he come up with the Mundell-Fleming trilemma at this point?
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So this is 65, yeah, he did, well-.
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>> John Hartley: So he'd already worked at the IMF?
5:02
>> Michael Bordo: His famous papers were already done, okay?
5:06
I mean, the trilemma thing comes in later, people.
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That was an interpretation by Dornbusch, okay?
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Mundell didn't use that term, but
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Dornbusch is the one that came up with that.
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So I was influenced by Harry, by Bob Mundell,
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by Bob Fogel, and by Milton Friedman.
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So these were the influences that I had.
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But I also took courses from Stigler, who was great, and
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there were some other people, and Anorld Harberger, too.
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So I had fantastic teachers and I started doing, in a sense, what I did.
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My dissertation was in monetary history, because one of the best things that came
5:47
out of Friedman's courses was reading and monitoring history of the United States.
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And that's been my Bible ever since and so we had to study it.
5:56
We pass the footnotes.
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If you wanted to pass the monetary economics prelim,
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you had to know that stuff, and I did.
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>> John Hartley: Really, that's fantastic.
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>> Michael Bordo: Yes.
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>> John Hartley: And I mean, that book came out, what, in the 1960s?
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>> Michael Bordo: It came out in 1963, okay?
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And it's still the classic, it's the Bible.
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If you wanna understand the history of the Fed monetary history,
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that's where you always start.
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So I worked with Friedman.
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My dissertation was with Friedman, and Fogel was on my committee.
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And it was a monetary history thesis which tested
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Friedman's ideas using historical examples, okay?
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So that was my thesis.
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And then I met Anna Schwartz because I needed data and
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I got in touch with her, this was my last year at Chicago, and we got on very well.
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And then I got Milton to, in a sense, arrange for me to go to the NBER for
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four months to work with Anna to get the data I needed.
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>> John Hartley: This was when the NBER was in New York.
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>> Michael Bordo: It was in New York City and
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I went there the first year after I started teaching.
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I had my first teaching job in Canada at Carleton University in Ottawa.
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And I came down to New York and I worked with Anna all summer, and
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we hit it off, okay?
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And it's like she became my mentor and I started writing papers with her.
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And she had an assignment to write a paper on a survey on monetary history.
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She didn't have time to do it all, so she said, look, could you do this?
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I did it, I put a lot of time into it and it was a big hit.
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And then more papers came along, and we started writing stuff together, okay?
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And we started getting involved in big projects.
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And so that's the reason why I'm in the United States,
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because through Anna, I then got invited to Carnegie, Rochester.
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The conferences in the 70s, and I got-.
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>> John Hartley: Which were very famous, I mean, at the time.
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>> Michael Bordo: Yeah, that was the place to go and so I was there from 77.
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And I got involved with Bruner and Meltzer, and I met lots of people,
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I met all the luminaries in economics.
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John Taylor was there, then Jacob Frankel, Stan Fisher, I was there,
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I got to know these people.
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And then I started working more and more with Schwartz, and
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then it was like they took a vacuum cleaner to the border [LAUGH] and
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sucked me across, okay?
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I was a visiting Scholar at the St Louis Fed, and
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I got an offer to go to the University of South Carolina because one of
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my classmates from Chicago, Mike Connolly, was there.
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And Carleton was great, but I was getting paid peanuts, had a huge teaching load.
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And so I moved to South Carolina,
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I had really light teaching load and tripled my salary.
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And, of course, Carleton, did they match the offer?
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They just said, bye bye bye, and I left, and I never came back.
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But that's what got me it was the Anna Schwartz connection that got me into
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the United States.
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>> John Hartley: Is there a reason why you think Canadians have been so
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prominent in the international economics field?
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Canada was the first country to really break away from Bretton Woods and
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its fixed exchange rate system in the 1950s and floated for
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a good period over ten years.
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And then went back to fixed exchange rates in the 60s, or
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the Dieffenbach, as it was called.
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And then they went back to floating after the whole Bretton Woods system broke down
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in the early 70s.
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But do you think that there's a reason why, I guess people like Mundell and
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people like yourself, I guess maybe growing up in Canada,
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more of an international type lens to things?
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I feel like when I grew up in Toronto,
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that maybe I sort of developed a bit of a sense for international news a little bit.
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>> Michael Bordo: Well, I mean, yes, Canada was always
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the quintessential small open economy.
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Canada was a small country, I mean, big geographically, but
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population very small, next to the United States.
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And so whatever was going on in the States would affect us, okay?
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And so Canada had really had to worry about its balance of payments.
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And so much of international monetary economics was developed in
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part because of this issue.
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And so Canadians always thought in terms of international and macro,
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those two things were tied together and international trade.
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Some of the great trade people theorists were Canadians, too,
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like John Chipman, but there are a whole lot of others, Ron McKinnon from here.
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>> John Hartley: Right, another great international thing.
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>> Michael Bordo: Ronna Hoover, guy at Stanford guy is Canadian,
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he came from Alberta, okay?
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>> John Hartley: And very famous for
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coining the whole idea of financial repression.
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>> Michael Bordo: Right, but also he worked on the dollar standard, and
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he was really incredible.
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But it's the Canadian connection, I was good friends with him.
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So there are a lot of us that did this, and it's just sort of,
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and the bank of Canada also, they were part of this.
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I mean, people who were at the bank had, some of them had studied in the States and
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in England, and they were thinking the same way.
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And in a sense, just getting back to your story about the 1950s.
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So what happened, I'm writing a paper on that right now.
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So what happened is Canada joined the Bretton woods System, but
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the problem was that they picked a parity that was too low.
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And after World War II, especially at the end of the 40s,
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there was a huge capital inflow from the United States to Canada, okay?
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When the Korean war came along, they needed our resources.
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So this, what this did was it pushed up,
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we were on a fixed exchange, the peg, okay?
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It was a dollar at that time, the parity was a dollar.
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It pushed up the International Reserves of the Bank of Canada and
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it was a huge capital inflow, huge increase in reserves and
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this had a very big inflationary effect.
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And so Canada got permission to temporarily leave the Bretton Woods peg
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and float.
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But what happened was they were pretty successful at doing it,
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and the floating exchange rate system, which was an anathema to
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the Bretton Woods System, it was very successful, okay?
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So they deep pegged in part because the post World War II
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capital inflows were causing inflation.
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It was an inflation shock from the US.
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And then they were pressured by the IMF to go back.
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And there's a whole big story about a governor of
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the bank of Canada, a guy named James Coyne.
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He followed too tight a policy in the latter part of the 50s,
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causing a worse recession in Canada than the US.
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And his idea was that he wanted to stop capital inflows.
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He thought capital inflows a big problem and so
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he thought the way to do that was to tighten even more.
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He didn't understand Mendel Fleming.
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In fact, Mundell wrote his famous paper because of
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the mistake that Coyne made, okay?
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And then what happened?
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Coyne got fired and there was a big turmoil in Canada.
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And what happened was they then decided to go back to the pegged exchange trade,
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and they did so in a very messy way and it was a financial crisis.
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Canada went back to floating in the 60s, okay?
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And whatever was going on in the world, that was terrible, that is the great
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inflation here in the United States, we imported it, Canada imported it.
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And so the performance was pretty bad and then again,
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the shocks coming from the States, okay, were the reason why they went back.
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They left it in 1970, because this is the great inflation, okay, it's Arthur Burns.
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And so Canada left and went on a float.
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And so it's what drove Canada's decision to float, okay?
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And really affected Canadian monetary was what was going on in the United States,
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and it's always been that issue, okay?
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I mean, later in the century, it's China too, because they are a resource,
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major resource, commodity, resource exporter.
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But Canada's an open economy, so that's the answer.
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>> John Hartley: Wow, I mean, that's totally fascinating,
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both as somebody that grew up in Canada and
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someone who works in international economics to some degree.
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So you've written, in your career,
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you've written 350 academic papers, approximately about 20 books.
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I'm curious, what have been some of your favorite accomplishments in economic
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history and monetary economics?
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What would you say your main ideas about monetary economics are?
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I think it's safe to say that you like to take the economic history
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sort of long view.
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I think in the same tradition of Friedman and Schwartz,
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you like to take the old sort of Chicago monetary economics approach and look at
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economic history as a kind of laboratory looking at various monetary experiments.
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And I would assume that you would recommend that policymakers
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should pay extra careful attention to history and perhaps look back at it.
15:59
More, I wanna talk about, I guess,
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just a few different sort of strands of work that you've been involved in.
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You had a very famous conference volume with Anna Schwartz on the gold standard,
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can you talk a little bit about that?
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>> Michael Bordo: Yeah, so we had a conference in 1983 at Hilton Head,
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South Carolina, an NBR conference.
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And the reason we held it was because there was a lot of interest at the end
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of the Great Inflation in the US going on some kind of tying the dollar to gold.
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And there was a commission, US Gold Commission in DC,
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it was a Congressional Commission.
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Anna Schwartz, she was in charge,
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she was the director of it and I was her staff, okay?
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I did the crunching and I did a lot of the work in the book that we put out.
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And so I was really involved in the gold standard, okay?
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And then I was visiting the St. Louis Fed and the research director at the time,
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Ted Balbach, who was a student of Alan Meltzer and Bruner,
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he asked me to write a paper explaining what the gold standard was.
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And I put in a lot of time, I was there for a year.
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I wrote a paper on the classical gold standard, I explained it.
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I put a lot of data together, okay?
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They published it in the St. Louis Fed Review in 1981, and
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it got more hits than any other paper they ever published, okay?
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Because this is the interesting gold.
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So our conference was to say, let's look at history because there's so
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much interest in gold.
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How did the gold standard work?
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How did it work?
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How did monetary policy work in the gold standard?
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Why did it break down?
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Why is the gold not a good idea today?
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So we commissioned papers by some really top people.
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And I was the co-organizer with Anna Schwartz and Marty Feldstein,
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who was heading to the NDR then, he and I got on really well.
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And so he just wrote a blank check to have this big conference.
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We had probably the best people, many of the best people in international
18:08
monetary economics at this conference, a lot of whom aren't around anymore.
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Friedman was there, Bruner was there, Mundell was there, Thorne Bush,
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I can just go through the list and Frankl, and so that was a great book.
18:23
And I wrote a big paper at the beginning on the sort
18:27
of the history of ideas on the gold standard.
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How did how do people think about the gold standard?
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And how did thinking about the gold standard evolved?
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And I wrote this big paper, history of economic thought mainly, and
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people still cite it, okay?
18:46
So I feel really good about that.
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>> John Hartley: That's terrific.
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And then what about, you have another very famous conference volume with Barry Iken,
18:54
Green on, I think, the Bretton Woods system,
18:57
that I think has been very influential in sort of documenting a lot of
19:00
the historical facts around Bretton Woods.
19:03
Can you talk a little bit more about that?
19:04
>> Michael Bordo: Yeah, so what we did was the Bretton Woods system collapsed
19:10
in 1971 when Richard Nixon president closed the gold window.
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There's a whole lot written about that,
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George Shultz was part of that process, okay?
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But what we did was we had this idea, I had this idea with Barry that
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we would have a retrospective on Bretton Woods 20 years after it.
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Okay, since 1991, again, we commissioned really top people
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in international monetary economics to write the papers.
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And I did the first paper, which was, in a sense,
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a survey on the Bretton Woods system.
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What was the Bretton Woods system?
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How did it evolve?
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Okay, what were the problems the Bretton Woods system, why did it break down?
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And so that was the first paper, and
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then there were a lot of really great papers that followed that.
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And that first paper is still, when anyone works on Bretton Woods,
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they always go back to that paper.
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So I feel great about that.
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>> John Hartley: And we're now at the 50th anniversary of the breakdown of
20:10
the Bretton Woods system.
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Do you think that we've sort of learned anything in the past 50 years
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about exchange rates?
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And obviously, things have changed a little bit in the sense
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that we now, certainly, most advanced economies,
20:27
I think, still have floating exchange rates.
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And Friedman, I think, arguably won that debate with a famous
20:36
debate with Bob Mundell over fixed versus floating exchange rates.
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This was something, if you look back in some of Friedman's older work and
20:47
say, capitalism and freedom,
20:49
he would have these very famous debates with Bob Mundell.
20:53
And the fixed versus floating debate was a thing for a long time.
20:58
I mean, now it's easy, you can look sort of in hindsight.
21:01
Well, obviously, floating exchange rates kinda make sense for a number of reasons.
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But interestingly,
21:10
I feel like it certainly was not clear when the Bretton Woods system broke down.
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>> Michael Bordo: Sure it wasn't but you see, I mean-.
21:19
>> John Hartley: There's still some people that out there, I think, who are there,
21:22
gold, standard, oil, standard exchange rate,
21:24
people who still wanna- >> Michael Bordo: [CROSSTALK] Union came
21:27
out of that against a pushback to floating exchange rates.
21:31
>> John Hartley: The optimal currency areas,
21:33
certainly, Mundell was part of that.
21:35
>> Michael Bordo: Right, but in a sense, the way I see it is Milton, and this is
21:39
one of Milton's great accomplishments, he won the war he really did.
21:44
The world's been on floating since the 70s.
21:49
It took them like 15 to 20 years to realize you had to conduct sound
21:53
monetary policy.
21:54
In fact, Friedman said two things.
21:56
He said, floating gives you independence, okay?
21:59
But he said that what really matters is the policies you follow.
22:04
If you follow bad monetary policies, floating isn't gonna be good for you,
22:07
it may even exacerbate your problems.
22:10
So it took 15, 20 years before they figured that one out.
22:13
But what's happened is since then, it's very successful.
22:17
And all the countries that went on floating and
22:20
the advanced countries have done extremely well.
22:23
And in a sense, what they did was, again, going back to Friedman.
22:27
Friedman said, you need a monetary rule and
22:30
you need an anchor to anchor monetary policy.
22:33
And the countries, the most successful countries, Canada, okay,
22:38
Australia, New Zealand, Sweden, the ones who floated early and
22:44
developed these it inflation target, they've done the best.
22:49
So I see the floating, which some people used to call a non-system.
22:54
I see that as an amazing accomplishment.
22:58
>> John Hartley: It's fascinating to just, I mean, think about how that has evolved.
23:03
And certainly now, I think too, the whole concept of what
23:08
you could kinda call Washington consensus, or
23:13
dare I say neoliberal consensus around not only free-flowing
23:18
exchange rates but floating capital or capital flows.
23:23
I feel like over the past decade or so, there's been a bit of a change
23:28
in thinking around what the IMF thinks about capital inflows and
23:32
hot money, and that it's maybe not so great to have.
23:36
So they're sort of on the capital control side of things,
23:41
I think the IMF has budged a little bit and
23:44
we're not quite in that old Washington consensus world anymore.
23:49
But it's an interesting debate that still goes on,
23:54
both free exchange rates versus fixed and
23:58
the whole should we have free floating capital flows?
24:04
I wanna talk to you a little bit more about banking crises.
24:08
And certainly, given that we've been seeing recently in the US,
24:12
there's been a lot of attention around Silicon Valley bank and
24:16
regional banks that have been failing and have entered receivership with the FDIC.
24:22
You've written a very famous paper on the history of banking and financial crises,
24:28
as well as many other famous papers on lender of last resort powers.
24:33
I'm curious what you think about the whole regional banking
24:38
crisis that we're seeing now and some of these old historical
24:43
credit crunches that we tend to see around these Fed hiking cycles.
24:49
What do you think economic history should teach us or
24:53
teach policymakers about these sorts of banking crises that seem to crop up.
24:59
Or credit crunches that seem to crop up when central banks are raising interest
25:03
rates in response to, say, inflation?
25:05
>> Michael Bordo: Yeah, so, I mean, there's a number of themes that are going
25:09
on at the same time, and people don't always recognize that.
25:13
So one of the themes that comes out of my work
25:18
on credit crunches with Joseph Halbrook,
25:23
a researcher at the Cleveland Fed, is that the business cycle.
25:31
If we look at the business cycle in the US,
25:33
we went all the way back to the 1860s, okay?
25:35
But the business cycle in the US in the post World War II period,
25:41
always has this sort of pattern whereby the Feds behind the curve, okay?
25:47
There's a recession, they follow expansionary policy, but they keep going
25:52
too long, and then inflation starts to heat up and they tighten.
25:56
And what almost always happens is that as the tightening
26:01
cycle progresses, there's financial stresses, okay?
26:06
There's bank failures, there's savings and
26:09
loans, I mean, there's a whole history of credit crunches, okay?
26:13
It's part of the pattern.
26:15
And what our research shows and is looking at today is that
26:21
most of those episodes occurred when inflation was low.
26:27
And so when the Fed tightened, in a sense, the credit crunch was a signal for them to
26:31
loosen because they had pretty well knocked the inflation out of the system.
26:36
But there were two episodes in the 1970s when this pattern happened and
26:42
the Fed did not, the Fed was tightening.
26:45
It then loosened in the early 70s and in 75, and
26:49
then they threw in the towel again because unemployment is going up, okay?
26:54
And the great inflation kept ratcheting up, so there were two big mistakes.
26:58
Well, here we are right now, where we still have inflation,
27:02
it's persistent, okay?
27:04
It's like 4.5 or 5%, okay?
27:08
And we have a credit crunch, and the Fed is gonna pause, okay?
27:12
Because they don't wanna have a full blown financial crisis.
27:17
But the risk is that they don't get rid of the inflation and then they have
27:22
to do more tightening, which could lead to more financial instability, okay?
27:27
So the other theme, is the theme about banking regulation and
27:32
lender of last resort, okay?
27:35
So one of the things we saw in this recent SVB crisis and
27:39
now with the bank in New York is that, in a sense,
27:43
when it looks like there's, that a bank is in trouble and
27:48
it's a big bank and possibly politically connected, okay?
27:54
They're gonna get bailed out and the depositors are gonna get bailed out.
27:57
This was happening with SVB, I couldn't believe it when they talked about,
28:01
when Janet Yellen talked about, well,
28:04
uninsured depositors will make sure that they don't lose any money.
28:08
Well, the whole point of uninsured depositors,
28:12
it goes back to the legislation in the 1990s, was that they would be,
28:17
they would police the banks and they would make them honest.
28:21
They would keep them from making the kinds of risky moves that a lot of the banks do.
28:26
They would keep them looking at their balance sheets.
28:29
And so we get a crisis because the banks make big mistakes and
28:34
because the Fed is tightening, why is the Fed tightening?
28:38
Because they're too late, they were way behind the curve after the pandemic.
28:43
So they caused the inflation, then they're tightening is causing a recession,
28:48
totally predictable, and it's causing financial stress.
28:53
And then you got this moral hazard problem tied in with bailing out or
28:57
protecting the big institutions.
29:00
Not so big, but still big institutions that are involved.
29:03
So I see this as pretty terrible, actually, it's passing.
29:09
>> John Hartley: And I also just on this whole topic of sort of what causes
29:14
inflation?
29:15
You recently did some work with Mickey Levy for
29:19
a conference in the UK on how large fiscal expansions can lead to inflation.
29:26
But I suppose they can also be accommodated by monetary expansions.
29:29
Can you talk a little bit more about that and sort of your view over, for
29:34
example, the current sort of global inflation scenario?
29:38
Obviously, there's a massive debate right now about what degree
29:43
supply chains versus fiscal policy versus monetary policy versus other causes.
29:51
There's some people out there that are arguing that corporations are raising
29:55
prices.
29:56
And it's like an IO kind of story, I'm curious, where do you land in?
30:02
>> Michael Bordo: I'm totally retro, I mean,
30:04
I think that inflation is a monetary phenomenon.
30:07
But I do think that when you say a monetary phenomenon,
30:10
it's usually because there's large fiscal expansion too.
30:14
And so we looked at just at the history across countries, the history of big
30:20
fiscal expansions, inflation, and we found that in most cases it's wartime.
30:26
And what happens is, like it happened in the United States,
30:30
is you have a huge fiscal expansion, okay?
30:33
Because you got to fund the war, and monetary policy is very accommodative.
30:38
So you get the money supply going up and you got big fiscal deficits and
30:42
we got inflation.
30:43
In World War II, we had controls, which in a sense were successful in the sense that
30:48
patriotism got people not to evade them as much as they otherwise would have, okay?
30:53
So that was, and we looked at the history of different countries going all the way
30:57
back to the 18th century.
30:59
And so what we found was that when you have big shocks which involve
31:04
fiscal expansion, that the central banks usually involved, okay?
31:09
And that you get inflation and we were very eclectic on the theories, okay?
31:15
So we, the way I saw it was,
31:17
I always had this sort of simple monetarist or the,
31:22
or the sergeant Tom Sargent story about how the central
31:28
bank is always gonna accommodate the FIDC, okay?
31:33
But I was very-.
31:34
>> John Hartley: Fiscal dominance, kind of-.
31:35
>> Michael Bordo: The fiscal dominance story but
31:37
I've always been sympathetic to John Cochrane's work on fiscal theory.
31:42
The price, in a sense, the jury's out on what goes on.
31:47
But fiscal is when you have big inflation, fiscal is almost always involved, okay.
31:54
And even the great inflation, okay, the great inflation was the Vietnam War.
32:00
And Johnson's great society and the Fed was accommodating, okay?
32:05
So that was a peacetime, it was a war, but not a world war.
32:12
I see the pandemic as World War II, existential crisis, okay?
32:18
The government in the US, UK, a whole lot of other countries,
32:22
they throw the kitchen sink at it.
32:24
And the central bank, the Fed, the Bank of England, they accommodate it, okay?
32:30
And so, it was so predictable to me, that this was going to lead to inflation.
32:35
And then there's all this talk about the supply shocks, supply this supply.
32:39
I've always thought that supply shocks are relevant price changes,
32:44
and they're temporary, okay?
32:46
All that can be part of the process.
32:49
But what's behind it always is monetary expansion,
32:54
and usually what's behind that is fiscal.
32:58
And so I just knew it in 2020, that we were gonna have inflation.
33:04
And we said this in this paper, and
33:07
then we had two pieces in the Wall Street Journal where we worked in early 2021,
33:12
we were predicting that this was going to happen, and we were right, okay?
33:17
Larry Summers did the same thing, Larry Summers is more famous than me,
33:21
that he's the one that gets the credit.
33:23
But we were right, and the Fed was wrong, and they blamed it on temporary.
33:27
And so that's-.
33:29
>> John Hartley: Transitory.
33:30
>> Michael Bordo: Right and it comes to me, it's just knowing history.
33:34
And so my criticism of the Fed and other central banks,
33:38
is they should look back at their own histories, and
33:42
how could they not see this was coming?
33:45
I find it impossible to understand.
33:49
>> John Hartley: Absolutely, I feel like history is such an important thing to
33:53
always think about, and there's the famous saying,
33:56
I think history doesn't repeat itself, but it certainly rhymes.
34:01
That's fascinating, I'm curious, just your time at Chicago, do you have any
34:05
particular Friedman stories or anything like that you wanna show?
34:08
You also wrote many papers with Anna Schwartz.
34:11
I feel like this sort of long and wonderful macro and
34:16
monetary history tradition doesn't quite get its due
34:21
enough in economics departments today.
34:25
Some departments, like Northwestern and Sanford certainly are still very invested
34:31
actively in economic history, and as are many other departments as well.
34:37
But I feel like in terms of developing new talent, it can be a bit rare nowadays.
34:43
But I'm curious,
34:44
do you have any particular fun stories that you'd like to share?
34:48
>> Michael Bordo: I mean, anybody who [COUGH] knew Friedman,
34:53
will tell you that he was a great teacher.
34:58
If you were a graduate student, he was a very nice guy.
35:02
He was hard to get an appointment to see him, he was really busy, okay?
35:09
But when I saw him, we got on just fine.
35:13
And the thing about Friedman, he was really like,
35:17
if you weren't a graduate student, and if you were an economist,
35:21
established economist, and you came to the money workshop.
35:25
Then you were in big trouble, because Friedman,
35:28
he was really incredible how he would take people apart.
35:31
But the one episode that I remember, it sticks in my brain, okay?
35:36
And there are a few people around that could remember, but not too many.
35:40
So one time he had Robert Clower come down to the money workshop,
35:44
Clower was Northwestern.
35:45
Clower was a monetary theorist, a Keynesian, and he was giving one of his
35:50
famous papers called a Keynesian perplex or something like that.
35:54
Okay and I like Clower, he was a really nice guy, I liked him a lot.
35:59
[LAUGH] So the way Milton ran the money workshop, everybody was supposed to
36:05
read the paper first, and they were supposed to have comments.
36:10
And the author, he had five minutes to just clear up the typos and
36:15
just say, motivate it.
36:17
And then Breeden would go, like, he'd go around the room, you'd say,
36:22
page one, page two, the people would jump, okay?
36:25
But if it was somebody like Clower, I heard he did this to other people.
36:30
So Clower gives his intro, and then Milton says, Bob,
36:34
I don't understand how a smart guy like you [LAUGH] could be working on such jobs.
36:40
He said, okay.
36:43
And it's like, very forward.
36:46
Yeah, but Friedman was really good, and he was so brilliant.
36:53
It's like, all of us who were students, we were kind of, intimidated by Friedman.
36:58
He was a nice guy, but still, you just knew,
37:01
you never had the insights that you had.
37:04
I always had that feeling in Chicago, I studied under the greats.
37:11
>> John Hartley: Absolutely, what you did.
37:13
>> Michael Bordo: I did, I was extremely lucky.
37:16
And I knew Friedman when he was at the height of his analytical abilities, okay?
37:23
That's mean, he did all his major work in monetary economics, and
37:28
before that, price theory, okay?
37:30
Later, he became, a public intellectual when he came out here and
37:36
he focused me, came to Hoover.
37:38
But so I didn't know Friedman in those years.
37:40
I mean, I came out here a couple of times and saw him, but we got on just fine.
37:45
I mean, one time I came out, I came to California for a conference,
37:50
for a meeting, and I tipped off Milton that I was coming, and
37:55
he invited me over there to his apartment.
37:59
>> John Hartley: This is in San Francisco?
38:00
>> Michael Bordo: Yeah, I went to his apartment on Russian Hill, and
38:03
it was really nice and roses, I always gone out flying with Rose, too.
38:06
So, I had lunch with them and it was really fun,
38:10
just hanging out with Friedman.
38:12
I mean, everybody will say how he was brilliant, okay?
38:18
I think he was one of the two in my view, but
38:23
not a lot of people don't agree anymore.
38:27
I think he still was one of the two best economists of the 20th century.
38:31
>> John Hartley: Absolutely, I think a lot of people would still [CROSSTALK].
38:33
I'm a bit biased, yeah, absolutely.
38:37
I mean, I think obviously there's others that would be in that conversation
38:42
as well.
38:42
But certainly, I mean, it's just amazing to think everything from the great
38:48
microeconomics work that he did, theory of the consumption function,
38:53
permanent income hypothesis type work.
38:56
Certainly all the macro theory work around monetary targets and
39:01
the Friedman rule of optimality,
39:04
all the economic history work that we've been talking about,
39:10
we've only been talking about just one branch of Friedman's brilliance.
39:16
And of course, all the public policy work and
39:19
we also did great labor economics working.
39:22
His dissertation was on occupational licensing with Simon Kuznets and
39:28
so, just so prolific.
39:30
And I feel like those sorts of economists are so rare these days.
39:33
>> Michael Bordo: I was very lucky, I was lucky to be, and I was extremely,
39:37
even as lucky or more lucky to spend 30 years working with Anna Schwartz
39:42
because Anna Schwartz, okay, she didn't get the credit.
39:46
She didn't get the Nobel Prize, but she was a key person in Friedman's work, okay?
39:52
And that a monetary history of the United States was a joint product,
39:58
and she did a lot.
39:59
And I worked with her and we got on really fine.
40:02
She had the same views as Milton, but
40:07
she was interested in economic history more than he was.
40:14
And I found working with her was really one of the best things that
40:19
ever happened because I worked with her for 30 years, okay?
40:24
That launched my career in the United States.
40:27
And we just did some great work together.
40:30
And see, Milton was already out here at Hoover, and
40:34
he wasn't doing the kind of academic work in monetary economics
40:39
that he had done until the 70s, but Anna, she kept it going.
40:44
She talked to him, every week they would talk.
40:47
And Anna was out there getting, she was in the NVR,
40:50
she went to the monetary economics conferences.
40:53
She followed everything, and she would be always keeping Friedman up to date, okay?
40:59
But she was really, really smart.
41:01
She wasn't a techie, okay?
41:04
She didn't do models, but she understood models.
41:09
And she always understood that you have to go through the models to see
41:13
what the story is, and that's been my approach.
41:17
I go to macro workshops, I get tuned out when they get into the numerics and
41:24
the equations, but the story is what I'm interested in.
41:30
I learn from them, from Anna, especially to see what exactly is this guy saying.
41:37
So I learned what I got from them was how to get to the heart of an issue and
41:43
see what's really important, what's the deep fundamental.
41:48
And Friedman, he was, as you know, he always nailed it.
41:53
He always hit the nail on the head.
41:55
>> John Hartley: Absolutely, this has been a real privilege, Michael,
42:00
to talk to a fellow Canadian economist on so
42:04
many great topics of economic history from Bretton woods.
42:08
Various inflationary episodes, including the one we're currently living in,
42:14
the banking crises, and to what degree.
42:17
There's some similarities with a lot of past credit crunches in today's rate
42:22
tightening cycle and things that we've been seeing recently with regional banks.
42:27
This has been a real honor, and I really wanna thank you for joining us, Michael.
42:30
>> Michael Bordo: Thanks, it's my pleasure, really [LAUGH].
42:33
You gotta stop me, and I can keep going [LAUGH].
42:36
>> John Hartley: This has been great, thank you so much.
42:37
>> Michael Bordo: Okay.
42:38
>> John Hartley: Today I was joined by Michael Bordo, a monetary historian,
42:42
professor of economics at Rutgers University,
42:44
Distinguished Visiting Fellow at the Hoover Institution, and
42:48
a research associate at the National Bureau of Economic Research.
42:52
This is the capitalism and freedom in the 21st century podcast where we talk about
42:56
economics, markets and public policy.
42:58
I'm John Hartley, your host, thanks so much for joining us.
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