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Milton Friedman Speaks: Money and Inflation (B1230) - Full Video — Transcript

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0:05Music
0:09Reality
0:10captured in user friendly
0:12symbols and processed
0:13for understanding.
0:18Music
0:32The Idea Channel
0:55The topic I am going to talk
0:56about tonight--I had thought
0:58it was announced,
0:59if not it will come as a
1:01surprise to you but I hope not
1:02as an unpleasant surprise is
1:04the topic of money and inflation.
1:07It's not a topic I think
1:08there's anybody in this room
1:10who is uninterested in,
1:11at least the inflation half of it.
1:14Most of you
1:14are also very interested
1:16in the money half,
1:17but from a different point of view.
1:20Whenever I talk
1:21about inflation, I am
1:21reminded of a wonderful
1:23story about the man
1:25who decided to take advantage
1:27of the growing science of
1:28cryogenics--that's the
1:30science of freezing people
1:32up so that they can be in
1:33deep freeze for a time and
1:34then restored to life--and
1:36he got himself put into
1:38the deep freeze for a
1:39twenty-year period. And of
1:41course before he went into
1:42the deep freeze he left
1:44all his securities and his
1:45worldly belongings at his
1:47broker's with instructions to
1:50do the best he could for him.
1:53And twenty years later,
1:55after the deep freeze had
1:56worked, he was
1:57unthawed and came out of
1:59the deep freeze, and of
2:00course the first thing he
2:01did was to run to the
2:02telephone to call his broker.
2:05And his broker said
2:06to him, "Well you know,
2:08you're a millionaire
2:09many times over." "Oh, really?"
2:11said the man.
2:12"What happened to this stock?"
2:13And the broker said it went
2:14from here to here;
2:15you know...
2:16it multiplied ten times...
2:17twenty times.
2:19"What happened to this stock?"
2:20He kept on going.
2:21But suddenly, the telephone
2:23operator interrupted, the
2:24man was just ecstatic the
2:26telephone operator
2:27interrupted and said,
2:29"Sorry, your three minutes
2:30are up. That'll be
2:31$250,000 for the next
2:33three minutes, please."
2:34(Laughter)
2:42That's real inflation.
2:46That's at the
2:48moment a story, but it's
2:51not a story which does not
2:53have some examples in history.
2:56Inflation is a disease.
3:01It's a dangerous
3:03disease for a society.
3:06It is sometimes a fatal
3:07disease for a society.
3:10It's a disease that if
3:12allowed to rage unchecked
3:14can destroy a society,
3:16and we have many such
3:17examples. The classic
3:20examples, of course, are
3:22the extreme examples of
3:25Germany, of Austria, of
3:28Russia after the First
3:30World War when inflation
3:34really did reach levels at
3:36which the kind of
3:37apocryphal story I told
3:38you was a literal
3:40description of the
3:41reality, when inflation
3:44reached levels at which
3:46employers would pay their
3:48workers three times a
3:49day--after breakfast,
3:50lunch, and dinner--so they
3:52could go out and spend the
3:53money before it lost all
3:54its value. That's the real
3:56extreme cases. But you
3:59don't have to go to such
4:00extreme cases to see the
4:02enormous harm which
4:04inflation left unchecked
4:06can do. You have many
4:09examples in South America.
4:12Brazil, before 1964, was
4:16brought down by an
4:17inflation that led to a
4:19revolution that toppled
4:21the existing government in
4:23order to stem the
4:24inflation. In the famous
4:26case of Chile with Mr.
4:29Allende in power, he
4:31produced an inflation
4:33which was one of the major
4:34factors that caused the
4:35economic catastrophe that
4:37led to the replacement of
4:38his government by a
4:40military dictatorship. We
4:43are nowhere near that
4:45stage in the United
4:46States, but it behooves us
4:48as a nation to pay
4:49attention to this disease,
4:51to ask ourselves what is
4:54the cause of the disease,
4:56how do you cure the
4:57disease, what are the
5:00effects of the cure, what
5:04are the side effects of
5:05it, and what will happen
5:06if we don't cure it? And I
5:09propose to discuss the
5:10topic tonight under those
5:12headings, and then go on
5:14to consider in somewhat
5:16more specific detail the
5:19experience of the United
5:20States over the past
5:22decade or two, and the
5:24present situation that we
5:25face. Now the first step
5:30toward understanding the
5:31cause of inflation is to
5:34recognize that it is
5:36always and everywhere a
5:38monetary phenomenon. It's
5:41always and everywhere a
5:43result of too much money,
5:47of a more rapid increase
5:49in the quantity of money
5:50than in output. Moreover,
5:54in the modern era, the
5:56important next step is to
6:00recognize that today
6:02governments control the
6:04quantity of money so that,
6:06as a result, inflation in
6:08the United States is made
6:11in Washington and nowhere
6:12else. Of course no
6:16government, any more than
6:17any one of us, likes to
6:18take responsibility for
6:19bad things. We are all of
6:21us human. If something bad
6:23happens, it wasn't our
6:24fault. And the government
6:26is the same way, so it
6:29doesn't accept
6:30responsibility for
6:31inflation. If you listen
6:33to people in Washington
6:34talk, they will tell you
6:36that inflation is produced
6:37by greedy businessmen, or
6:40it's produced by grasping
6:41unions, or it's produced
6:43by spendthrift consumers,
6:46or maybe it's those
6:48terrible Arab sheiks who
6:49are producing it. Now of
6:53course businessmen are
6:54greedy. Who of us isn't?
6:57Trade unions are grasping.
6:59Who of us isn't? And there
7:02is no doubt that the
7:03consumer is a spendthrift.
7:05At least every man knows
7:06that about his wife. But
7:10none of them produces
7:11inflation for the very
7:13simple reason that neither
7:14the businessmen, nor the
7:17trade union, nor the
7:18housewife has a printing
7:22press in their basement on
7:23which he or she can turn
7:24out those green pieces of
7:26paper we call money. Only
7:28Washington has that
7:29printing press and
7:31therefore only Washington
7:31can produce inflation. If
7:34you listen to the people
7:36from the communist world,
7:37they will tell you
7:38inflation is a capitalist
7:39phenomenon. That's not
7:42true. If you look at
7:44Europe today, one of the
7:46most rapid rates of
7:48inflation in Europe has
7:49been in Yugoslavia which
7:51is a communist country.
7:53One of the slowest rates
7:54of inflation has been in
7:56Switzerland which is a
7:58capitalist country. So
8:00inflation is not a
8:01capitalist phenomenon, but
8:04neither is it a communist
8:05phenomenon. If Switzerland
8:08has low inflation, the
8:10United Kingdom in recent
8:11years has had inflation
8:13rates running up to 20-25
8:15percent a year. Italy has
8:17inflation rates today of
8:19that order of magnitude.
8:22Inflation is not a
8:23capitalist phenomenon, it
8:24is not a communist
8:25phenomenon, it is a
8:26printing press phenomenon.
8:29Now in saying that
8:31inflation is a printing
8:32press phenomenon, in
8:34saying that inflation is
8:35always caused by a more
8:39rapid increase in the
8:40quantity of money than in
8:42output, you are only at
8:43the beginning of the
8:44problem, because you must
8:46distinguish the immediate
8:48cause from the more
8:50ultimate cause. You must
8:52ask: why is it that the
8:53quantity of money
8:54increases too rapidly? But
8:56before I go on to that
8:58question, I just want to
9:00settle for once and for
9:01all the point that
9:03inflation is a monetary
9:04phenomenon. That
9:06proposition has been
9:08documented over and over
9:09again. We have evidence
9:11for the United States for
9:12over a hundred years, for
9:13Great Britain for two
9:14hundred years, for Sweden
9:15for two hundred years.
9:17There has never in history
9:19been an inflation that was
9:21not accompanied by an
9:23extremely rapid increase
9:24in the quantity of money.
9:26There has never in history
9:27been an extremely rapid
9:28increase in the quantity
9:29of money without an
9:30inflation. But in order to
9:32persuade you of this
9:33quickly and with a minimum
9:35waste of time, I have
9:37brought a few pictures
9:38along to show you that
9:40will graphically
9:41illustrate the proposition
9:43about the relation between
9:46money and inflation. And
9:48I'd like to, if we can
9:50start with the first of
9:51those slides now. Maybe
9:53you can make out that
9:54there are two lines on
9:55that chart. That chart is
9:58for the United States and
10:00it covers the thirteen
10:01years from 1964 through
10:071976. In one of those
10:10charts, the solid line is
10:13the quantity of money per
10:15unit of output and the
10:17other line, which is the
10:18dashed line, is the
10:21consumer price index.
10:24Those two lines cross at
10:261970 because that's the
10:27way they are constructed.
10:29Both of those series were
10:31expressed on 1970 as the
10:33base of 100 in order to
10:35try to get the two series
10:38in the same scale. But
10:41there is nothing
10:42whatsoever in the
10:44arithmetic of it to make
10:45those two curves the same
10:46elsewhere. And I may say
10:49that the quantity of money
10:51that's plotted there is
10:53the quantity of money for
10:54a year ending six months
10:57before the price index. So
10:59that you are not...
11:02there's nothing funny
11:03about that and you can see
11:06that the two lines are
11:07almost indistinguishable.
11:09Now I've got a segment of
11:10thirteen years up there,
11:12but if I had a segment of
11:13a hundred years the
11:15relationship would be the
11:16same way throughout the
11:18whole of that period. But,
11:20you may say, that's only
11:21for the United States, but
11:26what about other
11:27countries? And so let's
11:28have the next slide. The
11:30next slide is for Germany
11:32for the same period, and
11:34again you will see the
11:35same story. Now the
11:37interesting thing here is
11:39that you can see that the
11:40quantity of money for a
11:41while in the later...in
11:42the seventies was running
11:46ahead of the price index,
11:48but now they are coming
11:49back together again, and
11:51that's a behavior you very
11:53often observe. The
11:55quantity of money per unit
11:57of output is the major
11:58factor that from the
12:00immediate sense determines
12:01the price index but it
12:02doesn't operate
12:03instantaneously. Sometimes
12:05there are delays of a year
12:07or two, but sooner or
12:08later they all come back
12:10together. Well, the United
12:11States and Germany are
12:12very similar countries.
12:14What about another
12:15country? Let's have the
12:16third chart. And the third
12:19chart there is supposed to
12:21be for Japan, and I can't
12:23read it. Is that what it
12:24says up there? That's for
12:27Japan, and you will notice
12:30that Japan experienced a
12:31much greater price rise
12:33than either the United
12:34States or Germany did, but
12:36Japan has now been coming
12:38back. It's done a
12:39remarkable job of
12:40controlling the quantity
12:41of money and, as a result,
12:44the rate of price
12:45inflation in Japan has
12:47come down from close to 30
12:48percent a year to where
12:49today, in the period after
12:51this chart, it's back down
12:53to about 7 percent. But
12:54again, you have the same
12:56synchronism between the
12:58two charts. Now...the next
12:59chart... let's have the
13:01next chart which is for
13:04Great Britain. You can see
13:07each one of these shows a
13:08little bit more inflation
13:09than the preceding one,
13:11but in each one of them
13:12you again have the same
13:13relationship in every case
13:15between the quantity of
13:16money and prices. Now one
13:19of the interesting things
13:20about that comparison
13:21between Japan and the
13:22United Kingdom is you will
13:24hear many people telling
13:26you that the real reason
13:27you have inflation is
13:28because of trade unions.
13:30If you listen to anybody
13:31telling you about Great
13:33Britain's plight, they
13:34will tell you that the
13:35real problem in Great
13:36Britain is that you have
13:37such strong trade unions-
13:39that they push up wages
13:40and that causes inflation.
13:43Well if that explains this
13:44relationship for Britain,
13:46what explains the previous
13:47chart for Japan where
13:49trade unions are not very
13:51important, are much weaker
13:52than they are in Great
13:53Britain? Or what explains
13:55the next chart, which is a
13:57honey, for Brazil? Can we
13:59have the last chart? Now
14:00that's an inflation that's
14:01really an inflation.
14:02That's none of these baby
14:06inflations we've been
14:11playing with. Of course
14:15there are still better
14:16ones in Argentina and
14:17Chile, but we don't have a
14:19big enough room. Now
14:23here...if trade unions
14:25caused inflation...As you
14:27know, Brazil has a
14:28military government and
14:30trade unions have
14:31absolutely nothing to say
14:32about anything, except as
14:33they are branches of the
14:35government apparatus. So
14:38that it's clear that you
14:39cannot explain in the case
14:41of Brazil the inflation by
14:45trade unions, but you can
14:46see very clearly that you
14:48can explain it by changes
14:49in the quantity of money.
14:51Thank you. We can have the
14:52lights back on now. As I
14:58say, that's a very small
15:00sample of the evidence
15:02that is available on the
15:04linkage between the
15:05quantity of money on the
15:07one hand, and prices on
15:08the other. That evidence
15:10is available for hundreds
15:12of years in many countries
15:14and there are no
15:15exceptions. But that only
15:17gets you to first base.
15:20The question is: why is it
15:23that the quantity of money
15:24increases relative to
15:25output? If you go back a
15:29hundred years ago- and
15:31here in California this is
15:33very appropriate to go
15:34back a little more than a
15:35hundred years ago,
15:37sometimes the quantity of
15:38money increased more
15:39rapidly than output
15:41because of discoveries of
15:42gold or precious metals.
15:44As you know you had the
15:46Gold Rush in California in
15:47the late 1840s, early
15:501850s, you had the
15:52Australian gold
15:53discoveries in the same
15:54period--in the 1850s, and
15:56you had a worldwide
15:57inflation as a result. In
16:00the 1890s to 1913, you had
16:02a worldwide inflation
16:05because of the perfection
16:09of the cyanide process for
16:10extracting gold from
16:12low-grade ore which
16:13produced an outpouring of
16:15gold from South Africa to
16:19supplement the gold
16:20strikes up in Alaska. But
16:23those were the good old
16:24days, before the days when
16:26government discovered that
16:28it could escape from that
16:31relic of an earlier time,
16:33the discipline of gold,
16:35and that it had a much
16:36more scientific method of
16:37controlling the quantity
16:38of money by ending the
16:42link to gold and instead
16:45turning to
16:46government-dominated
16:47money, and today you do
16:50not have inflations for
16:51those reasons. Today you
16:55have inflations because
16:57governments create a very
16:59large quantity of money.
17:01The question is: why do
17:02governments do that? And
17:04today in the main there
17:07are fundamentally three
17:08reasons, in my opinion,
17:12why we have experienced
17:13inflation and why it is a
17:15threat. The first and by
17:18far the most important is:
17:21in order to pay for
17:24government spending. Of
17:27course... I say that
17:29government does this;
17:30that's wrong. The
17:32government doesn't do it.
17:33You do it, I do it, we the
17:35citizens do it. We tell
17:37the people in
17:38Washington--we tell out
17:39congressmen, and our
17:40senators and our
17:41representatives: "We want
17:43you to spend more money on
17:44us, but we don't want you
17:47to put any taxes on us, oh
17:48no! We don't want you to
17:50levy taxes. We want you to
17:51spend more but we don't
17:53want you to tax more."
17:56There is no way you can do
17:57the one without the other.
18:00The real tax on the
18:01American people is what
18:02government spends. If the
18:07federal government spends
18:08$450 billion and only
18:10raises $400 billion in
18:13taxes, who do you suppose
18:15pays that other 50 billion
18:17dollars? Do you suppose
18:20the tooth fairy does?
18:26You pay it and I pay it, and
18:28one of the ways we pay it
18:30is by the tax which we
18:32call inflation. Inflation
18:35is from this point of view
18:36a form of taxation. If
18:39government spends more
18:40than it takes in, in the
18:42form of things that are
18:43called taxes, it has to
18:45meet the difference either
18:48by printing money or by
18:50borrowing from the public
18:52at large. Printing money
18:56is a very attractive
18:58device because inflation,
19:02from the point of view of
19:03a person sitting in
19:05congress or in the senate,
19:06is a wonderful tax. He
19:08doesn't have to vote for
19:09it. Have you ever known of
19:12a congressman who got up
19:13and said, "I vote to
19:14impose a tax in the form
19:16of inflation of 10 percent
19:18next year"? No sirree.
19:22Inflation is a tax which
19:25is imposed without
19:26representation and which
19:28nobody has to vote for.
19:30And of course it's a
19:31marvelous tax from the
19:32point of view of a
19:33congressman trying to meet
19:35the demands of his
19:36constituents for more
19:38spending. Inflation yields
19:44tax revenue in three
19:48different ways. It yields
19:50it directly. We think of
19:52these pieces of paper we
19:54carry in our pocket as
19:55money but it would be just
19:57as accurate to think of
19:59those as receipts for the
20:02taxes you've paid. If you
20:05pay the government $100
20:06directly in taxes, the
20:07government sends you back
20:08a receipt, "You paid us
20:09$100 in taxes." Well now,
20:12the beauty of printing
20:13money is that the receipt
20:15is right straight with the
20:16payment of taxes. What you
20:18are getting is not money
20:20but tax receipts. And from
20:24the point of view of the
20:25government, those pieces
20:27of paper--and I'm
20:28exaggerating, of course;
20:29they are not really pieces
20:30of paper, that's only the
20:31primitive way of doing it.
20:32In our modern age we do it
20:34in a more sophisticated
20:35way through using a
20:38bookkeeper's pen or a
20:39computer instead of having
20:40to turn the printing
20:41press. It's in a form
20:43called deposits, one of
20:45the most misleading terms
20:46in the human language.
20:48When I think of a deposit,
20:50I think I put something
20:51there and there it is. But
20:53you know, when you go into
20:54a bank and deposit money,
20:56the people behind the
20:57counter run as fast as
20:58they can to another part
20:59of the bank to pay it out
21:00over another counter in
21:01the form of loans. It's
21:03not deposited there. And
21:06similarly, when the
21:08government sends a check,
21:11it may in effect be doing
21:13the equivalent of printing
21:14paper money. I won't go
21:17into the details of that
21:19process. You will get the
21:20right answer if you think
21:22of it strictly as printing
21:24paper money. So when the
21:32government gets revenue
21:33from inflation directly in
21:35the form of these pieces
21:36of paper, it can go out
21:38and spend without having
21:39gotten taxes from anybody.
21:41But it also gets revenue
21:43in two other ways. In the
21:45first place, with the kind
21:47of tax system we have,
21:50inflation raises other
21:52kinds of taxes without
21:53anybody having to vote for
21:54it. You might think that
21:59if prices go up by 10
22:00percent and your income
22:02goes up 10 percent you are
22:04in the same position as
22:05you were before, but you
22:06are not. You are pushed up
22:09into higher brackets of
22:10the income tax and on the
22:12average, if prices go up
22:1510 percent and your income
22:16goes up 10 percent, your
22:19taxes will go up 15
22:20percent. So the congress
22:24again is in a marvelous
22:26position. It can vote to
22:28lower tax rates when in
22:30fact taxes are going up.
22:32There's a lot of talk in
22:33the papers these days and
22:35the news these days about
22:37the president proposing a
22:38tax cut next year. That's
22:42pure fiction. Nobody is
22:44proposing a tax cut. These
22:46much publicized tax cuts
22:48of the past few years have
22:49not been tax cuts at all.
22:53Inflation has raised taxes
22:55and the so-called tax cuts
22:56have given back a small
22:57part of that to the
23:00taxpayer, but the actual
23:02taxes that taxpayers have
23:04paid have gone up as a
23:07result of the automatic
23:08effects of inflation. In
23:10the third place, the
23:13government gets revenue
23:15from inflation by
23:17repudiating its debt. Many
23:21people keep worrying about
23:22the government debt.
23:24That's not something you
23:25should worry about because
23:27the government debt today
23:29is smaller--that is, the
23:32announced government debt,
23:34the open and above-board
23:35government debt, bonds
23:37outstanding and the
23:38like--is smaller as a
23:40percentage of the national
23:41income than it was 20-30
23:46years ago. How can that
23:48happen? Every year we have
23:50deficits. How can the debt
23:51be going down? Because
23:54those are not real
23:55deficits. They are
23:56deficits that have been
23:58financed by inflation.
24:02Anybody who has bought
24:03government securities in
24:04the past ten years has
24:05paid the government for
24:06the privilege of lending
24:07to it. Anybody who has
24:15bought a long-term
24:17government bond and then
24:18redeemed it has gotten
24:19back an amount of money
24:21which has less purchasing
24:22power, less ability to buy
24:25goods and services, than
24:27the sum he initially paid
24:28for the bond. And to add
24:30insult to injury, he has
24:32had to pay taxes on what
24:33they call interest, and as
24:38a result, the debt has
24:41gone down in meaningful
24:42terms. So inflation is a
24:47marvelous resource for a
24:48government in all three of
24:50these ways. That I think
24:55has been the main reason
24:56throughout history, not
24:59only now but going back
25:00for thousands of years.
25:02You know you had a great
25:03inflation during the time
25:05of the Roman Empire when
25:07Diocletian was emperor. He
25:09did it in a different way.
25:11He did it by taking nice,
25:13good, full-bodied silver
25:15coins and replacing the
25:17silver by an alloy that
25:21was worthless until there
25:23was less and less silver,
25:24until one of the history
25:26books talks about the
25:27ancient denarius which
25:29used to be a full-bodied
25:30silver coin finally having
25:32become in Diocletian's era
25:34little more than a copper
25:36coin with a wash of
25:37silver. Now I happened to
25:40come across that quotation
25:42the same year in which the
25:44American Treasury was
25:45replacing our full-bodied
25:46silver coin by a copper
25:49coin with not even a wash
25:51of silver, only of nickel.
25:54History does repeat
25:55itself. So that's been
26:01always throughout history
26:02a major reason why you
26:04have had creation of money
26:05to finance government
26:07expenditures. But we've
26:08added another reason in
26:10these days, and that's
26:12allegedly to promote full
26:14employment. In the postwar
26:16world, after World War II,
26:19every country in the West
26:20has had a full employment
26:21policy which means not
26:25that we have had full
26:26employment--on the
26:27contrary, as you know, we
26:28have been having
26:29increasing unemployment in
26:30recent years--but that
26:32every time for quite a
26:34period there was a threat
26:36of unemployment or
26:37unemployment started to
26:38rise, there was a strong
26:41tendency by government to
26:42say, "We've got to do
26:43something about this: we
26:44have to print more money,
26:46we have to spend more
26:47money, we have to
26:49stimulate the economy,"
26:51the result of which has
26:53been to create an
26:55increased quantity of
26:56money that in the first
26:57instance has had some
26:59favorable effects on
27:00employment but only
27:02temporarily, only so long
27:03as you could fool the
27:04people. And then when
27:07people got on to what was
27:09going on, it came out in
27:10the form of inflation. In
27:13the United States, we have
27:14also had, and in most
27:16countries, a third less
27:19important factor that has
27:20contributed to excessive
27:22increases in the quantity
27:23of money, and that has
27:25been mistaken policies by
27:26the central bank.
27:28Professor Siegan referred
27:30to the mistake of the
27:33Federal Reserve Bank in
27:34the late '20s and early
27:36'30s. From 1929 to 1933
27:40the quantity of money in
27:41the United States went
27:42down by a third, and that
27:45was a major factor that
27:46produced the catastrophe.
27:49That was the great mistake
27:50of the Federal Reserve. It
27:52learned from that mistake.
27:55Government agencies, like
27:56people, don't always make
27:58the same mistake the next
27:59time; they make a
28:00different one. And since
28:03that period, the central
28:04banks have tended to make
28:05the mistake in the
28:06opposite direction. Their
28:08mistake has almost always
28:10been caused by confusing
28:13their function, by
28:14thinking that they had
28:15something to do with
28:16interest rates instead of
28:18recognizing that their
28:19real function was to
28:20control the quantity of
28:21money. Now most of you
28:25will be inclined to say,
28:28"Well that's all very
28:29well, but aren't there
28:31some important things
28:32you've left out?" Of
28:34course the most obvious
28:35thing you would have told
28:36me I left out was trade
28:38union behavior, but I hope
28:41I have already persuaded
28:42you that that's not a
28:45fundamental source of
28:46inflation. Trade unions
28:48may do a great deal of
28:49harm in a great many ways.
28:51Trade unions have done
28:52Britain enormous harm, but
28:55they are not responsible
28:56for Britain's inflation.
28:58Higher wages are in the
28:59main a consequence of
29:01inflation and not a cause
29:02of it. And as I say, the
29:04examples of these charts I
29:05gave you before, I hope,
29:07will show that anybody who
29:09thinks that's a
29:10fundamental cause of
29:11inflation had better pause
29:13for a bit. But there are
29:15two other factors that
29:16people are inclined to
29:17cite. One is to say, "What
29:21about international
29:22influences?" The
29:24government is particularly
29:26fond of citing this, to
29:27say, "Oh well, you mustn't
29:29blame us for inflation.
29:30We've imported it from
29:31abroad. There's a
29:33worldwide inflation and
29:34how can you expect the
29:36United States to stay
29:38clear of inflation if all
29:39the rest of the countries
29:40of the world are
29:41inflating?" That was a
29:44valid explanation before
29:471971 when we had a
29:50worldwide system of fixed
29:52exchange rates. In that
29:54case it is true that
29:58inflation in one country
29:59would tend to spill over
30:00into another because it
30:02would influence the
30:03quantity of money. In that
30:05case it was inflation in
30:08the United States that
30:11produced inflation in many
30:12countries around the world
30:14because their currencies
30:15were linked through a
30:18fixed exchange rate with
30:19ours. But today that
30:21explanation is not valid.
30:24As long as countries have
30:27variable floating,
30:28flexible exchange rates
30:30between their currencies,
30:32inflation is a national
30:33phenomenon, and not an
30:34international phenomenon.
30:36And the proof of that is
30:37very simple. Inflation is
30:40a worldwide phenomenon,
30:46but it is not an
30:48international phenomenon.
30:50You know in every country
30:51of the world you have too
30:52high taxes, but high
30:54taxation is not an
30:55international phenomenon.
30:57It's just that all the
30:58nations of the world do it
30:59at the same time. In the
31:01same way you have
31:02inflation in many
31:03countries. But if it were
31:05an international
31:06phenomenon, how come it's
31:07roughly zero to 1 percent
31:08in Switzerland, 4 to 5 or
31:106 percent in Germany, 10
31:12percent in France, 18
31:14percent in Great Britain,
31:16maybe higher than that in
31:18Italy, and so on down the
31:20line? No...inflation is a
31:23national phenomenon
31:25produced by monetary
31:27policy and other policies
31:29within the countries. Now
31:31the second argument that
31:32will be made: "You've left
31:34out of this picture
31:35productivity." In those
31:37charts, what was it that I
31:40connected with prices? It
31:43was not simply the
31:44quantity of money; it was
31:45the quantity of money per
31:47unit of output. And it's
31:49true, anything that
31:51increases output will tend
31:53to hold down prices. So
31:56it's very common for
31:57people to say, "Well, the
31:58real source of inflation
32:02is that our productivity
32:04has not been increasing as
32:05much as it should," or to
32:07say that the real cure for
32:08inflation is to increase
32:10productivity. Now
32:12productivity is an
32:13enormously important
32:14phenomenon. From the point
32:16of view of our standard
32:17life, of how well we live,
32:20there's nothing that is
32:21more important. If we can
32:23get a rate of real growth
32:26of 3 percent instead of 2
32:27percent, that will make a
32:29great difference over a
32:30period of time. And I
32:32don't doubt that one of
32:33our national problems is
32:35the fall off in the growth
32:37in productivity. But from
32:39the point of view of
32:40inflation it's the wrong
32:41order of magnitude. It
32:44would be a tremendous
32:45achievement to raise the
32:48average rate of growth of
32:49real output in this
32:50country from 3 percent a
32:51year to 4 percent a year.
32:53That would be a 33-1/3
32:54percent increase. It would
32:56be a dramatic change, but
32:59it would reduce the rate
33:00of inflation by 1
33:01percentage point a year.
33:04And from that point of
33:05view, the possible
33:08variations in the quantity
33:09of money are much greater
33:11than the variations in
33:12output and productivity.
33:14So from the point of view
33:15of inflation, productivity
33:19is very much of a bit
33:21actor on the stage. The
33:23lead, the hero or the
33:25villain, as you wish it,
33:27is not productivity but
33:29what happens to the
33:30quantity of money.
33:34Now...so much for the
33:35cause of inflation. It's
33:38very easy to say what the
33:39cure is. There's no
33:41problem how to stop
33:43inflation. That's the
33:44easiest thing in the world
33:45to say: in order to stop
33:47inflation you have to have
33:49the government spend less
33:51and print less. That's the
33:53only way you are going to
33:54stop inflation. That's the
33:57one and only cure. But you
34:00know, the real problem
34:02isn't to know how to cure
34:03inflation; the real
34:05problem is to have the
34:06political will to do so.
34:08If I may go back to my
34:10medical analogy, some
34:12years ago my physician
34:13told me about a young man
34:15who was a patient of his
34:17who had a debilitating
34:18disease as a result of
34:20which his fingers were
34:21threatening to fall off,
34:23his toes were threatening
34:24to fall off, and my
34:26physician said: "You know,
34:27that young man could be
34:28cured in no time. The only
34:30thing he has to do to be
34:31cured is to stop smoking,
34:34but I cannot in any way
34:36bring him to stop smoking.
34:37He refuses to do it." Now
34:40the disease was curable in
34:42one sense but it was not
34:44easy to do it. An analogy
34:46that in some ways is much
34:48closer to the problem of
34:49inflation--it's a very
34:51literal analogy but also
34:53something of a medical
34:54analogy--is alcoholism.
34:58The thing about alcoholism
35:00is that when you go out on
35:01a toot the good effects
35:03come first and the bad
35:05effects only come the next
35:06morning when you have the
35:07hangover. That's exactly
35:10the way it is with
35:11inflation. When you start
35:14inflating the good effects
35:16come first. After all, the
35:18government's printing
35:19money, everybody thinks
35:20he's richer--he's got all
35:21these pieces of paper, and
35:24initially it does have
35:25that effect. It makes
35:27business good, it expands
35:28output. It's only after a
35:31while, when it has worked
35:32its way through to
35:33inflation, that the bad
35:35effects come later and you
35:37then have inflation.
35:42Similarly, on the other
35:44side, the great problem in
35:46curing an alcoholic is
35:49that the bad effects come
35:50first and the good effects
35:52come later when you try to
35:54cure it. If a man who has
35:56been subject to a craving
35:58for alcohol goes off the
36:01wagon, it's terrible. He's
36:03got a terrible time
36:06getting rid of his
36:07craving, but if he can
36:08once succeed in doing so
36:10everything will be fine.
36:11It's exactly the same
36:12thing with inflation. If
36:16you succeed in slowing
36:21down inflation, you will
36:23initially have some very
36:25difficult times. Just as
36:28inflating stimulates the
36:31economy temporarily, so
36:33slowing down inflation
36:35slows down the economy
36:36temporarily. A more direct
36:41reason why it's difficult
36:43to apply the cure is
36:45because it's not so clear
36:47that people want to stop
36:49inflation. If I ask
36:51people, are you in favor
36:52of inflation or not?
36:54Everybody is against
36:55inflation. But when I
36:57explore a little bit
36:58further, if I say to
36:59people, tell me, have you
37:01gained from inflation? "Oh
37:03no," they say, "I haven't
37:05gained." And yet the fact
37:06is that a great many
37:07people have gained from
37:08inflation. There are many,
37:10many people who have
37:11benefited. Of course the
37:13major gainer from
37:14inflation is the Federal
37:15Treasury, as I have
37:16already said. But almost
37:19everybody who has bought a
37:20home in the past thirty
37:22years has gained from
37:23inflation. He was able to
37:25borrow on a mortgage which
37:27inflation has paid off
37:29along with paying off the
37:30government debt so that
37:32almost all homeowners in
37:33this country are
37:34beneficiaries from
37:35inflation. Indeed, one of
37:37the things that makes
37:39inflation such a bad
37:43social disease is
37:45precisely that it tends to
37:47be divisive because some
37:50people do very well during
37:52an inflation period and
37:53some people do very badly.
37:55And as a result, the
37:56population gets split into
37:59people who are seemingly
38:00in great prosperity and
38:02people who are in great
38:03distress. When most people
38:07say they want to stop
38:09inflation, what they mean
38:11is that they want the
38:13prices of the things they
38:14buy to go down and the
38:18prices of the things they
38:19sell to go up. But since
38:24what one man sells is what
38:25another man buys, that's a
38:27neat trick if you can do
38:29it. And as a result,
38:32people aren't really
38:33serious when they say they
38:34want to stop
38:35inflation--certainly not
38:36in the early stages, not
38:37before they fully
38:38understand, not before it
38:40has gotten to the point
38:42where it is really
38:43creating serious social
38:44problems. Everybody wants
38:46to stop inflation at
38:49somebody else's expense.
38:52Now I've already said that
38:55if you start to cure
38:56inflation you will get
38:58some bad effects first.
39:02Let me emphasize that
39:04those bad effects are not
39:05themselves the cure; they
39:08are side effects of a
39:10cure. If you have your
39:12appendix out, if you go to
39:14a doctor and he says, "You
39:16have appendicitis. You've
39:17got to take your appendix
39:18out. But after your
39:20appendix is out you'll
39:21have to stay in bed. It
39:22used to be two weeks, now
39:23it's ten minutes, but
39:27you'll have to stay in bed
39:28for a little bit," and you
39:30say to him, "Well, you
39:31know, I think I'll just
39:32stay in bed and not have
39:33the operation." That isn't
39:35going to cure you. And in
39:38the same way, unemployment
39:41is not a cure for
39:42inflation. I can tell you
39:44a hundred ways to create
39:46unemployment that will
39:48produce more inflation not
39:50less. I may say, that used
39:52to be a proposition that
39:53people found it difficult
39:55to understand, but the
39:57experience of the past ten
39:59years or so has done a
40:00great deal to make people
40:02understand that it's
40:03perfectly possible to have
40:05unemployment and inflation
40:07go along simultaneously.
40:09In fact we have coined
40:10some ugly new words like
40:12"stagflation" and
40:14"slumpflation" to try to
40:16explain this phenomenon--I
40:18shouldn't say to explain
40:19it, to name it. So
40:22unemployment is not a cure
40:23for inflation, but it is
40:27an almost inevitable side
40:30effect of an effective
40:32cure. Now why should that
40:35be? Why is it that there
40:38seems to be no way to cure
40:40inflation without going
40:42through at least a
40:43temporary period of
40:45relatively slow growth and
40:47relatively high
40:48unemployment? The answer
40:51is fundamentally because
40:55of the time delays between
40:59the turning of the
41:00printing press and the
41:02ultimate effects on output
41:05and on prices. Both ways
41:09you produce the same
41:10result. Look on the
41:11upgrade. Suppose the
41:12government first prints
41:13money and spends it to pay
41:15for its expenses. To begin
41:18with, the people who find
41:22themselves doing better
41:23business don't know what
41:24the explanation is.
41:27Government is paying more
41:28money, its employees have
41:30better salaries, they are
41:31coming to the store and
41:32buying more goods, the
41:34storekeeper is delighted
41:35to sell them at the same
41:36prices as before. Each man
41:39thinks this is something
41:40special happening to him.
41:42The shoe manufacturer
41:43says, "Ah! Look, I can
41:45sell more shoes. The
41:46demand for shoes is going
41:47up." He doesn't recognize
41:50that what's really
41:51happening is that demand
41:52is going up everywhere and
41:54that not only is the
41:55demand for shoes going up,
41:56but he's going to have to
41:57pay more to get labor,
41:58he's going to have to pay
41:59more to get leather, he's
42:00going to have to pay more
42:01to produce his products.
42:04But when that shows up,
42:06when after awhile he finds
42:08out that his costs are up,
42:11then he suddenly discovers
42:12that he has to raise his
42:13prices to make both ends
42:15meet. And that's why on
42:17the average in the United
42:19States over the past
42:20hundred years an increase
42:22in the quantity of money
42:23has taken about five or
42:25six months to affect
42:26people's spending. The
42:28first thing that happens
42:29is people just have bigger
42:30bank accounts. Then it
42:31takes them a little while
42:32to realize that and they
42:33start spending it. And
42:35then it's another twelve
42:38to eighteen months before
42:40that works through into
42:41prices. So on the average
42:44over the past hundred
42:46years, and in Britain it
42:48has been for two hundred
42:49years--I say a hundred
42:51years because that's as
42:52far back as our data go in
42:54the United States--there
42:56has been about a two year
42:57interval between a more
42:59rapid increase in the
43:00quantity of money on the
43:01one hand, and the
43:04inflationary effects of it
43:05on the other. But the same
43:07thing happens the other
43:08way. If the government
43:10slows down its spending,
43:12in the first instance
43:13people simply experience
43:15that as slower demand for
43:17their products and they
43:20tend to retrench. They
43:22tend to say, "Well, my
43:23inventories are going up.
43:24I'd better cut back
43:25production." It's only
43:27after a considerable
43:28interval that that's
43:30reflected in lower prices
43:32or in a slower rate of
43:33increase in prices and
43:34works its way through. So
43:39there is no way that I
43:41know to avoid the interim
43:44effect of slowing down
43:45inflation. In the long run
43:51there is no relation
43:52between inflation and
43:53unemployment. On the
43:55average, suppose a country
43:58gets accustomed to 10
43:59percent inflation. That's
44:02perfectly livable, that's
44:03something people can get
44:04along with. What will
44:06happen? Everybody will
44:08know that it's going on.
44:09All wages will
44:10automatically tend to go
44:11up by 10 percent more a
44:12year than they otherwise
44:13would. All prices will
44:15tend to go up by 10
44:16percent more. Instead of
44:17interest rates being 5
44:19percent, they will be 15
44:20percent. Everything will
44:22get adjusted to it. We
44:25have a great deal of
44:26evidence that the average
44:28rate of inflation over a
44:30period of time has no
44:32relationship at all to the
44:34average rate of growth or
44:36the average level of
44:37unemployment. The thing is
44:39that only surprises
44:40matter. It isn't inflation
44:46that produces a stimulus;
44:49it's only higher inflation
44:50than you expected. It's
44:52only the surprise. If you
44:54get adjusted to it, it
44:56doesn't do any good. It's
44:57just like again alcoholism
44:58and drug addiction. When a
45:02fellow first gets started
45:05on drinking, all it takes
45:07is one drink to make him
45:09happy. But after his body
45:11gets adjusted to that, it
45:12takes a little more, and
45:13pretty soon he's taking a
45:14half a bottle. Similarly
45:18with drugs. It takes
45:19bigger and bigger doses to
45:20have the same effect. And
45:22similarly with inflation.
45:24As a country gets
45:25accustomed to higher and
45:26higher rates of inflation,
45:29it needs a bigger dose to
45:31have any stimulating
45:32effect. So in the long
45:36run there is no relation,
45:38but in the short run there
45:39certainly is. There is no
45:41way to avoid these side
45:43effects, but those side
45:45effects can be minimized
45:48by trying to take the cure
45:50gradually instead of
45:53overnight. Here we are in
45:56this nation with a base
45:58rate of inflation at the
45:59moment somewhere around 7
46:00percent. It would be a
46:02mistake to try to bring
46:03that down to zero next
46:04year. We ought to do it
46:06over a three or four year
46:07period to give people a
46:08chance to adjust. We can
46:11also minimize the side
46:12effects of inflation in my
46:15opinion by adopting a
46:17widespread program of
46:18escalator clauses,
46:19particularly with respect
46:21to government obligations,
46:24particularly with respect
46:26to taxes. I think it is a
46:28disgrace and a scandal
46:29that we have not had
46:32legislation which has
46:35adjusted the income tax
46:37system so that inflation
46:40does not automatically
46:41raise rates. Congress has
46:43been very quick to index
46:45its own salaries. Congress
46:48has been very quick to
46:50index the salaries of
46:51government employees, but
46:54it has been very reluctant
46:57to apply the same
46:58principle to the taxes
47:00that it imposes on the
47:01citizen. I must say myself
47:04I would go the other way.
47:08I would like to see the
47:09taxes indexed and with
47:11respect to the salaries of
47:12congress and of government
47:13officials, I would index
47:15them perversely; every 5
47:18percent inflation is a 5
47:19percent reduction in their
47:20salaries. And I assure
47:22you, if you did that you'd
47:23cure inflation real fast.
47:28One more general point.
47:31What if we don't cure
47:32inflation? We have no good
47:35choices. If we don't cure
47:40inflation, if we continue
47:41at high rates of
47:42inflation, we'll also have
47:43high unemployment. One of
47:46the main reasons is
47:48because of the false cures
47:50that will be attempted. In
47:52every country that has had
47:53great inflation the
47:54governments have resorted
47:56sooner or later to wage
47:57and price controls,
48:00supposedly as an attempt
48:01to cure inflation. We did
48:04that in this country in
48:051971 with disastrous
48:07results. Wage and price
48:10controls are not a cure
48:11for inflation. In fact,
48:14wage and price controls,
48:15you will find are imposed
48:16by governments that want
48:18to inflate but want to
48:19conceal it from the
48:21populace. Governments want
48:23to get a short-term
48:24benefit by pumping up the
48:26economy, but they want the
48:29populace to think they're
48:30doing something about
48:31inflation, so they
48:33announce with great
48:34fanfare that they are
48:35fixing prices and wages.
48:38But the result is only to
48:40hold down, to conceal the
48:42inflation for a year or
48:43two and then have it blow
48:44up, which is of course
48:46exactly what happened
48:47after 1971. In light of
48:51this background, I come to
48:53the final point I want to
48:54make. I think it's very
48:55instructive to look at
48:57recent U.S. history. Our
48:59inflation really started
49:01in the postwar period in
49:02the 1950s. In the 1950s,
49:07we first had a very
49:08substantial inflation
49:09during the Korean War and
49:11then after that was over
49:14we had a creeping
49:16inflation. It was an
49:21accident that that 1950s
49:23inflation didn't continue
49:26and grow from that point
49:27on, but we had a political
49:29accident. We had a
49:31nonpolitical president who
49:33was willing to risk the
49:36election of his vice
49:39president in order to stop
49:40the inflation. Mr.
49:43Eisenhower was willing to
49:45take the unpopular
49:46measures that stopped
49:49inflation, that put us
49:52back on a noninflationary
49:54course, by approving
49:57measures that led to a
49:59series of recessions in
50:011958 and then in 1960, by
50:04holding down government
50:06spending, holding down
50:07government money creation,
50:09so that from an inflation
50:12rate--which at that time
50:14was regarded as
50:15terrible--of 3 to 3-1/2
50:16percent it was brought
50:18back to essentially zero.
50:21Our real inflation started
50:24in the early 1960s when
50:28John F. Kennedy inherited
50:31this windfall of a
50:32noninflationary
50:33environment as a result of
50:35President Eisenhower's
50:36policies. And from 1960 on
50:40we have been on a roller
50:41coaster. We have been
50:42going up in inflation, we
50:44have been coming down, we
50:45have been going up and we
50:47have been coming down.
50:48Every time we go up there
50:50is a great outcry that we
50:51have to do something about
50:52stopping inflation, and so
50:54we tend to step on the
50:55brakes. That tends to
50:56produce a down turn. But
50:57the moment unemployment
50:58starts going up, there is
51:00an even bigger outcry, "We
51:02have to do something about
51:03the unemployment." So we
51:05reverse and step on the
51:06accelerator instead of the
51:07brakes, and we're off
51:09again. But this roller
51:10coaster is around an
51:12upward level. It has not
51:14been on the level. Each
51:16peak has been higher than
51:17the preceding peak. Each
51:19trough has been higher
51:21than the preceding trough.
51:23In 1961 the lowest rate of
51:26inflation at that time was
51:271 percent. In 1967, the
51:31next trough, the lowest
51:33rate of inflation was
51:342-1/2 percent. In 1971,
51:39before Mr. Nixon
51:40introduced price controls
51:42in order to control what
51:44was then supposed to be
51:45the horrendous rate of
51:46inflation of 4-1/2
51:49percent, in that period
51:51the lowest rate was about
51:524 percent. In 1976, last
51:57year, when again we went
51:59through a recession to
52:00stop the inflation, the
52:01lowest rate was 5 percent.
52:05So each bottom rate has
52:07been higher than the
52:08preceding one. Similarly,
52:09each top rate has been
52:10higher than the preceding.
52:12In 1966 we reached 4
52:15percent. In 1969 we
52:18reached 6 percent. In 1974
52:22we reached 12 percent. In
52:241979 we will reach--you
52:27fill in the numbers. It's
52:30not a pleasant prospect.
52:33So we've been on a roller
52:34coaster, going up and up
52:37and up, and we have been
52:39on that roller coaster
52:40because of the problem
52:41that I have mentioned that
52:42we get accustomed to our
52:44addiction and we need
52:46bigger doses to get
52:47another high. If we look
52:49at the most recent period,
52:53we've had the same
52:56situation again. From
52:59January 1974 to January
53:031975 the quantity of money
53:08defined to include the
53:10currency in your pockets
53:12and all deposits at
53:13commercial banks, demand
53:14and time, what has come in
53:17the jargon of the
53:19literature to be known as
53:22M2--I apologize for having
53:24given it that unlovely
53:26name-but M2 grew in that
53:28year at 6.8 percent a
53:31year. That was a
53:32relatively low rate and it
53:34was that that was
53:35responsible for the
53:36tapering off of inflation
53:38so that by the end of '76
53:41it was down to about 5
53:42percent on a year to year
53:44basis. But in the period
53:46from January '75 to now,
53:50the money supply has been
53:51running at the annual rate
53:52of 10 percent a year--M2,
53:54this quantity of
53:56money--and that portends
53:59an increase in the
54:00inflation rate. We are
54:02now... have hit the bottom
54:04and we are now on the way
54:05up. We had a temporary
54:06bulge in January-February
54:08as a result of the very
54:09hard winter, but the more
54:11fundamental phenomenon is
54:13that we are now on an
54:14upgrade, we will probably
54:16hit 7 to 9 percent next
54:17year or something like
54:18that, and the base rate
54:20of inflation today is
54:21somewhere in that level.
54:23The tragedy of this whole
54:25history is that we have
54:30time and again--four times
54:31now--paid the price of
54:35stopping an inflation and
54:37not gotten the benefit. We
54:40stepped on the brakes, we
54:42have slowed down the
54:43monetary expansion, we've
54:44taken a recession, we've
54:46had unemployment, and then
54:48just as inflation is
54:49starting to taper off we
54:51throw the whole ballgame
54:52away by going to the races
54:55again with the printing
54:57press. Unfortunately,
55:02given these mistakes, at
55:05the present time the
55:07options open to this
55:08country are only bad
55:09options. We don't have
55:10good options. If you were
55:13sitting in at the Federal
55:14Reserve Board and deciding
55:15on monetary policy, you
55:16mustn't suppose you would
55:17have anything good you
55:18could do. Whatever you do
55:20is bad. Given the amount
55:23of money that has now been
55:26pumped into the economy,
55:29you have only two bad
55:30choices. If you slow down
55:32drastically in order to
55:33try to hold back
55:34inflation, the economy
55:37will experience a
55:38recession in late '78 or
55:40early '79 and it may be a
55:43fairly severe recession.
55:45Alternatively, you can
55:47say, "Well we can't do
55:48that. We've got to step on
55:49the gas, keep doing what
55:51we are doing now." Then
55:53you are condemning the
55:54economy to going into
55:55another period of
55:56double-digit inflation.
55:59Two years ago there was a
56:00choice. Having paid the
56:02price for slowing down the
56:03inflation, we should have
56:06continued on a relatively
56:07slow rate of monetary
56:08growth and then we would
56:10by now be well on the way
56:12to a cure for our
56:13inflation. But we have not
56:17done so. And as I say, I
56:19don't really blame the
56:20people who are doing it.
56:21The real blame has to be
56:22put on us, the citizens,
56:25the voters of this
56:26country, for not telling
56:28our government what we
56:29want them to do. And I am
56:32afraid that we shall have
56:34to go through several more
56:36of these swings in the
56:38roller coaster before the
56:41American people decide
56:43that they have had enough
56:44of it and that it's time
56:46to bring it to an end,
56:47that it's time to send an
56:49unmistakable message to
56:51Washington, "We want you
56:52to stop the roller
56:54coaster." When we do,
56:56there is no technical
56:57difficulty about stopping
56:58it. Let me emphasize it
57:04will not be costless to
57:05stop it, but it will not
57:07be costless to continue
57:08what we are doing. If I
57:10may conclude with my
57:11medical analogy: if you
57:14are sick, it's very, very
57:16seldom that a doctor can
57:17give you a cure which will
57:18enable you to rise from
57:20your bed the next day a
57:21whole person completely
57:24unaffected by your
57:25illness. We have a disease
57:29called inflation.
57:31Fortunately our basic
57:33constitution is strong.
57:35This is a strong, healthy
57:36country although we have
57:37been doing our best to
57:38make it unhealthy. We have
57:40been doing our best to
57:41take measures that will
57:42reduce our productivity,
57:45but nonetheless we are
57:46still a pretty strong,
57:47healthy country. There is
57:49nothing basically wrong
57:50with us, but we have been
57:52suffering from a
57:53self-imposed disease of
57:54inflation. Sooner or
57:56later, I am sure we shall
57:59get up the will to cure
58:00it, but we shall not cure
58:02it, or continue it,
58:05without paying a price
58:06either way. Thank you.
58:29Dr. Friedman, if you were
58:30advising President Carter,
58:32would you advise him to
58:33work through the Federal
58:34Reserve or through
58:35congress to implement your
58:37recommendations? I'm not
58:41sure those are different
58:42and I'm not sure it's
58:43really President Carter
58:44who'd work through them.
58:45You know, the president
58:47has a lot of influence but
58:49very little power. The
58:51president does not pass
58:52the appropriation bills;
58:54the president has no
58:55direct control over the
58:56Federal Reserve printing
58:57press. The real sources of
59:00power in this respect are
59:02the congress and the
59:03Federal Reserve, together
59:05and jointly, and I believe
59:07that's where the public at
59:10large has to bring
59:11political pressure to bear
59:14to produce the right kind
59:15of policy. We need to
59:16change congress to get off
59:18the treadmill? No, we
59:19don't need to change
59:20congress, excuse me. You
59:22know, people have a great
59:23misunderstanding about
59:24this. People in congress
59:28are in a business, they're
59:30trying to buy votes,
59:32they're in the business of
59:34competing with one another
59:35to get elected. The same
59:37congressman will vote for
59:38a different thing if he
59:40thinks that's politically
59:41profitable. You don't have
59:42to change congress. People
59:44have a great misconception
59:45in this way. They think
59:46the way you solve things
59:47is by electing the right
59:48people. It's nice to elect
59:51the right people, but that
59:52isn't the way you solve
59:53things. The way you solve
59:55things is by making it
59:56politically profitable for
59:58the wrong people to do the
1:00:00right things. (Laughter
1:00:04and applause) You said,
1:00:10rather optimistically I
1:00:11think- that you have
1:00:12detected a trend wherein
1:00:15the public will accept a
1:00:16slowing down of the
1:00:18rolling of the printing
1:00:19presses. I confess that
1:00:20that trend is invisible to
1:00:22me, and I wondered what
1:00:23evidence of it you have
1:00:24seen. I was really not
1:00:26referring directly to a
1:00:27trend to slow the printing
1:00:28presses, but a more
1:00:30fundamental trend in
1:00:33people's ideas and
1:00:34attitudes toward the role
1:00:37of government. Ten years
1:00:39ago, twenty years ago, it
1:00:41was widely taken for
1:00:42granted that there was
1:00:44hardly any problem the
1:00:45solution of which did not
1:00:47reside in Washington, did
1:00:49not reside in throwing
1:00:50more money at the problem.
1:00:52Very few people believe
1:00:54that anymore today. People
1:00:56are greatly disillusioned
1:00:57about what government can
1:00:58accomplish. In the more
1:00:59particular area you are
1:01:00describing, worldwide and
1:01:04not merely in this country
1:01:06the public at large has
1:01:07shifted its major emphasis
1:01:09from unemployment to
1:01:10inflation. It is not any
1:01:13longer politically popular
1:01:16to reduce unemployment by
1:01:18creating inflation. If you
1:01:20take a case like Great
1:01:21Britain, which has in some
1:01:22ways been in the forefront
1:01:23of this, ten...twenty
1:01:26years ago it would have
1:01:27been said that it was
1:01:28absolutely politically
1:01:29intolerable to have had
1:01:31rates of unemployment of
1:01:32the kind that Britain has
1:01:33had. But today the Labour
1:01:35government in Britain
1:01:36finds it popular,
1:01:38politically popular,
1:01:39politically profitable, to
1:01:42put its emphasis on
1:01:43reducing the rate of
1:01:44inflation. In Britain,
1:01:46last September at the
1:01:47Labour Party Conference,
1:01:48Prime Minister Callaghan
1:01:50found it politically
1:01:51profitable to say, we used
1:01:53to think that if you had
1:01:56unemployment and a
1:01:57recession, the way to get
1:01:58out of it was by spending
1:01:59more money or cutting
1:02:00taxes, but if that was
1:02:02once a solution it is no
1:02:04longer an option open to
1:02:05us. I'm not quoting
1:02:06precisely, but the sense
1:02:07of it. He said, because
1:02:09we have learned that that
1:02:11only works temporarily but
1:02:12the ultimate result is
1:02:13more inflation. So you
1:02:16have in Britain, and in
1:02:17other countries around the
1:02:18world, a willingness on
1:02:21the part of the population
1:02:22at large to stand for
1:02:27measures directed at
1:02:28reducing inflation. The
1:02:30same thing is true in this
1:02:31country. Every public
1:02:32opinion poll has shown
1:02:35that inflation is a
1:02:36problem that the public at
1:02:37large is more concerned
1:02:38about than the problem of
1:02:39unemployment. It will not
1:02:41be...you see I think
1:02:43President Carter faces a
1:02:44real dilemma at the moment
1:02:47with respect to his own
1:02:48election prospects in
1:02:491980. He cannot
1:02:53control...I said before
1:02:54that he has much influence
1:02:55but little power. He
1:02:56cannot really control it
1:02:57but suppose he could, what
1:02:58should he do? He's facing
1:03:00a dilemma. Ten years ago
1:03:03the answer would have been
1:03:04obvious: step on the gas,
1:03:06print money, create a
1:03:08great period of prosperity
1:03:10by 1980--but with
1:03:11double-digit inflation.
1:03:13The double-digit inflation
1:03:14will do him more political
1:03:15harm than the boom will do
1:03:17him good. So I think
1:03:19there is a very strongly
1:03:20detectable change in the
1:03:22attitudes of the public at
1:03:23large. On the one hand
1:03:27they are more inclined to
1:03:28attribute the responsibility
1:03:31for inflation to government
1:03:32and to be more conscious
1:03:33of it. And on the other,
1:03:35they have less rosy views
1:03:38about the power of
1:03:39government to cure all
1:03:40ills. Thank you very much.
1:03:48Let's have some more
1:03:49people come up to increase
1:03:51our inventory. Professor
1:03:55Friedman, for the federal
1:03:56government's ability and
1:03:58willingness to produce
1:03:59unlimited amounts of
1:04:00money, what are the
1:04:01implications for the
1:04:02concept of a vital local
1:04:04and state government
1:04:05and...the broader
1:04:06question, implications for
1:04:07the concept of federalism?
1:04:10Well, obviously one of the
1:04:13trends that has been
1:04:14reducing the viability of
1:04:16local and state government
1:04:17has been a trend toward
1:04:18centralization, a trend
1:04:20toward enhancing the power
1:04:21and the strength of
1:04:23Washington at the expense
1:04:24of the state house and of
1:04:25city hall. And no doubt,
1:04:28the fact that Washington
1:04:30possesses a printing
1:04:31press, and the city hall
1:04:33and the state house do
1:04:34not, has been a factor
1:04:36that has been contributing
1:04:37to that. But again, we
1:04:39come back to the same
1:04:40question that has come up
1:04:41before: will that
1:04:43continue, is that
1:04:46necessary? Is it
1:04:47inevitable that the
1:04:48federal government will
1:04:49grow in power? If it is,
1:04:51if it does, then I agree
1:04:53with you that we would be
1:04:54headed toward a unified
1:04:57centralized country. I
1:04:59think one of our great
1:05:00strengths as a country is
1:05:01precisely the federal
1:05:02system; precisely that we
1:05:04have a distribution of
1:05:05power, that we do have
1:05:07states which attach
1:05:09loyalties to themselves,
1:05:11which have independent
1:05:12powers. So I think there
1:05:15is a trend in your
1:05:16direction, but I don't
1:05:17think it necessarily needs
1:05:19to continue or necessarily
1:05:20will continue. As a member
1:05:23of a government agency, do
1:05:24we do ourselves a
1:05:26disservice by quickly
1:05:28pursuing federal grants
1:05:31and funding to meet our
1:05:33needs when often those
1:05:34grants are not our
1:05:35priorities but just where
1:05:36we can get matching money?
1:05:38Well, you have a dilemma
1:05:40there. Given the program,
1:05:43given that there is a
1:05:44federal program, I can't
1:05:45blame you for trying to go
1:05:46get it. And yet, I think
1:05:48sooner or later the public
1:05:50will wake up to the idea
1:05:52that they really aren't
1:05:53doing themselves any favor
1:05:55by sending a dollar to
1:05:57Washington, and getting 80
1:05:58cents back. That's been
1:06:01the experience. What we
1:06:03have had...it's a great
1:06:04defect of the
1:06:08centralization and it's
1:06:11very hard to understand
1:06:12why people allow
1:06:13themselves to be fooled,
1:06:15but somehow they have the
1:06:16impression that if the
1:06:17money comes from
1:06:18Washington, somebody else
1:06:19is going to pay for it.
1:06:20But of course it's a
1:06:21two-way trip and there is
1:06:23a discount taken off in
1:06:24Washington as it turns
1:06:25around. I don't know if I
1:06:29can ask one more question
1:06:30but since I deal with high
1:06:32school students and I am
1:06:33concerned about economic
1:06:34education in our schools,
1:06:37what is your barometer as
1:06:38you talk to young people?
1:06:40What is their projection
1:06:42of the business economy? I
1:06:44deal with many young
1:06:45people who go into
1:06:46government thinking that
1:06:48that's where the jobs are,
1:06:49and that concerns me. What
1:06:51is your forecast? Again
1:06:54that is not preordained.
1:06:57We're masters of our own
1:06:58destiny; that depends what
1:07:00we as a people decide. If
1:07:02we as a people decide we
1:07:03want to continue on the
1:07:04path we've been going on,
1:07:05which I hope we won't, but
1:07:08if we do, why then your
1:07:10youngsters are better off
1:07:11going in to Washington;
1:07:12they will get better
1:07:13salaries. Do you people
1:07:16know what the highest
1:07:17average income county in
1:07:19the United States is? It's
1:07:23not San Diego County; it's
1:07:25not even Marin County;
1:07:27it's not Westchester; it's
1:07:29not any of those fancy
1:07:31Connecticut counties; it's
1:07:32Fairfax County in
1:07:33Virginia, the bedroom of
1:07:35the Washington civil
1:07:36servants. That's the
1:07:37highest average income
1:07:39county in the country. So
1:07:41you would be telling the
1:07:42students right if you said
1:07:44to them, "If you want to
1:07:45make an income, go to work
1:07:46for Washington." But it's
1:07:47up to us as citizens to
1:07:50make that no longer true.
1:07:52Thank you. Recently we've
1:07:59heard that the inflation
1:08:01currently experienced in
1:08:02this country won't respond
1:08:03to monetary restraint
1:08:05because it's cost-push
1:08:07inflation and not
1:08:08demand-pull. What response
1:08:11would you have to that
1:08:12analysis, if any? It's
1:08:14another example of the
1:08:16people who produce the
1:08:17inflation trying to find
1:08:20scapegoats for their own
1:08:21deficiencies. Of course
1:08:23the inflation will respond
1:08:25to monetary restraint.
1:08:27There is no such thing as
1:08:28cost-push inflation except
1:08:31in the form of the delayed
1:08:33effect of monetary
1:08:34inflation. If you have a
1:08:36monetary inflation that
1:08:37starts to push up prices
1:08:39it tends to hit retail and
1:08:41wholesale prices first,
1:08:42the prices you and I pay.
1:08:44It's only later that it
1:08:46works its way through
1:08:47costs, but then costs fall
1:08:49behind prices and there is
1:08:51a make-up period, and
1:08:53during that period you
1:08:54have what looks like
1:08:55cost-push inflation. But
1:08:57there has never been an
1:08:58inflation in history that
1:08:59didn't respond to monetary
1:09:00restraint. If you look
1:09:02at American experience it
1:09:03responded to monetary
1:09:04restraint. If you take
1:09:06that roller coaster I was
1:09:07telling you about, on each
1:09:08occasion the slow-down in
1:09:10the rate of inflation was
1:09:11preceded by a slower rate
1:09:13of monetary growth, and
1:09:15you have much more
1:09:16dramatic examples of that.
1:09:20The most dramatic example
1:09:22from American history of
1:09:23how inflation responds to
1:09:24monetary restraint was one
1:09:26that was once dug up by a
1:09:27student of mine when he
1:09:28was writing his
1:09:29dissertation on inflation
1:09:31in the Confederacy during
1:09:32the Civil War. And in the
1:09:35later parts of that war,
1:09:36you know the South
1:09:37financed the war almost
1:09:39entirely by printing press
1:09:40money and the rate of
1:09:41inflation during the Civil
1:09:43War in the South...I don't
1:09:44know... got up to
1:09:45something like 4 or 5
1:09:47percent a month or more.
1:09:50But at one point in the
1:09:51later part of the war the
1:09:52Northern army overran the
1:09:54place in the South where
1:09:55they were printing money
1:09:57and for two weeks the
1:09:58printing presses couldn't
1:09:59operate. And lo and
1:10:00behold, within two weeks
1:10:01the inflation stopped.
1:10:02(Laughter) And you've got
1:10:06many, many examples like
1:10:07that, so that what you can
1:10:09say to people is they are
1:10:11kidding themselves.
1:10:12Yes sir? I have been
1:10:15re-reading James Buchanan
1:10:19on the monetization of the
1:10:20debt and his conclusion
1:10:23that we can't possibly
1:10:24reduce the debt because of
1:10:25the depression effects
1:10:26that would result; in
1:10:28other words, we're stuck
1:10:29with it forever. What's
1:10:30your opinion on that?
1:10:32Which debt are you
1:10:33speaking of now? Are you
1:10:34speaking of the funded
1:10:35debt, the bonds? The
1:10:37funded debt. The funded
1:10:38debt--we've been reducing
1:10:39it every year. It's much
1:10:41smaller now in real terms,
1:10:45i.e., divided by prices or
1:10:46divided by income, than it
1:10:48was right after World War
1:10:49II. And how have we been
1:10:50reducing the debt? By
1:10:52monetizing it, by paying
1:10:54it off through inflation.
1:10:56Now when you come to the
1:10:57unfunded debt, this three
1:10:59trillion or more of
1:11:01obligations under Social
1:11:03Security and other
1:11:04programs, that's a much
1:11:05more difficult task. I
1:11:06think I may say, if you'll
1:11:07pardon me for a digression
1:11:09here for a moment- that
1:11:10those fiscal conservatives
1:11:13who keep their eye on
1:11:14balancing the budget and
1:11:15on the debt are making a
1:11:16great mistake and in fact
1:11:19that they have been the
1:11:21handmaidens of the big
1:11:22spenders. What has
1:11:24happened over and over
1:11:25again is that the big
1:11:27spenders get off and start
1:11:28spending money; this
1:11:30produces a deficit. The
1:11:32fiscal conservatives
1:11:33scratch their heads and
1:11:34say, "My God, we've got to
1:11:35do something about that
1:11:36deficit." So they go to
1:11:37work and raise the taxes
1:11:39to pay for the deficit,
1:11:41and as soon as they get
1:11:42the budget balanced again
1:11:43the big spenders are off
1:11:44to the next lap. And the
1:11:46so-called fiscal
1:11:47conservatives are turned
1:11:48out to do the dirty work
1:11:50for the big spenders. As
1:11:52I said before, keep your
1:11:54eye on one thing and one
1:11:56thing only, how much
1:11:57government is spending,
1:11:58because that's the true
1:11:59tax. Every budget is
1:12:01balanced. There is no such
1:12:03thing as an unbalanced
1:12:04federal budget. You're
1:12:06paying for it. If you're
1:12:08not paying for it in the
1:12:09form of explicit taxes,
1:12:11you're paying for it
1:12:12indirectly in the form of
1:12:13inflation or in the form
1:12:15of borrowing. The thing
1:12:16you should keep your eye
1:12:17on is what government
1:12:19spends, and the real
1:12:21problem is to hold down
1:12:22government spending as a
1:12:25fraction of our income.
1:12:26And if you do that, you
1:12:27can stop worrying about
1:12:28the debt. I have two very
1:12:30different questions but
1:12:31first I wonder if you
1:12:32would comment on an
1:12:33assertion with regard to
1:12:35your theory on the
1:12:36political process. It
1:12:37seems to me that the
1:12:38incumbents who disagree
1:12:39with you and with me are
1:12:40one step ahead of us and
1:12:42are so carefully
1:12:43insulating themselves in
1:12:44the political process by
1:12:45giving themselves vast
1:12:47perquisites and benefits
1:12:48of incumbency so we have
1:12:50people voting for their
1:12:51re-election not on the
1:12:52basis of their policies or
1:12:54their issue positions or
1:12:55their votes, but whether
1:12:56or not they are being
1:12:57serviced in their
1:12:58district, which is a
1:12:59vastly different situation
1:13:00than it was years ago.
1:13:02Well that may well be
1:13:03true. I agree with you
1:13:07that incumbency is an
1:13:08enormous advantage these
1:13:09days, that the drive of
1:13:11course for governmental
1:13:12financing of elections is
1:13:15really a drive to
1:13:16strengthen the power of
1:13:17incumbents and make it
1:13:18more difficult for anybody
1:13:20to challenge them, that
1:13:23the bill that was passed
1:13:25about campaign financing
1:13:27limiting private funds was
1:13:28also a major step toward
1:13:31increasing the advantages
1:13:32of incumbents. But I
1:13:34nonetheless believe that
1:13:38if the public at large
1:13:39feels strongly enough
1:13:40about a subject, congress
1:13:41will listen and act in
1:13:42accordance with it. Aren't
1:13:45some of the same people
1:13:46who feel strongly about
1:13:47this the same people who
1:13:48are so cynical and
1:13:50skeptical of the political
1:13:50process, therefore taking
1:13:52themselves out of the
1:13:53voting process? I'm not
1:13:55sure whom you are
1:13:56referring to at this
1:13:57stage--the people who
1:13:58don't vote? Well I'm
1:13:59talking about...we see
1:14:00more and more people
1:14:01becoming disenchanted who
1:14:02believe strongly in the
1:14:03free market, who are just
1:14:04giving up and saying, "No
1:14:05matter whom I vote for,
1:14:06the policies continue,"
1:14:07and as they take
1:14:08themselves out of the
1:14:09political process we're
1:14:10left with a proportionally
1:14:11large percentage of the
1:14:12others. But there is more
1:14:13than one way to make
1:14:14themselves effective. I
1:14:15understand your point. And
1:14:17I would say that the most
1:14:18encouraging move I've seen
1:14:20around is one which
1:14:22started in this state, and
1:14:25that is a move to take the
1:14:27total budget out of hands
1:14:29of the elected
1:14:30representatives and
1:14:31determine it through a
1:14:32constitutional amendment.
1:14:33That was the Proposition 1
1:14:34fight that was started
1:14:35here five years
1:14:37ago...unfortunately was
1:14:39defeated. But I am very
1:14:44much encouraged by the
1:14:46strength which the
1:14:48movement for such
1:14:49amendments around the
1:14:50country and at the federal
1:14:51level is gaining. As you
1:14:57know, last year Michigan
1:14:59had a similar proposition
1:15:00on its ballot and it was
1:15:01defeated, too. It's very
1:15:03interesting to compare the
1:15:05propaganda that was put
1:15:06out in California and
1:15:07Michigan five years apart
1:15:09on the same proposition.
1:15:10It was the same propaganda
1:15:11financed and fostered by
1:15:13the same groups, primarily
1:15:15the state education
1:15:17association, making the
1:15:19same kind of misstatements
1:15:21about the proposition,
1:15:29and in both cases with
1:15:30considerable success.
1:15:31But in both of those
1:15:32states and in a considerable
1:15:33number of others there is
1:15:35a grass roots movement
1:15:36that is growing, and I
1:15:38think we're going to see
1:15:39in the next four or five
1:15:40years at least a half
1:15:41dozen states adopt tax
1:15:45limitation or spending
1:15:46limitation amendments of
1:15:47that kind. In addition,
1:15:49on the federal level the
1:15:50Southern Governors'
1:15:51Conference a few years ago
1:15:53had a task force which
1:15:55drew up a federal
1:15:56amendment to limit federal
1:15:57spending. That task force
1:16:00was headed by Governor
1:16:02James Edwards of South
1:16:03Carolina. Unless I am
1:16:04mistaken, the Southern
1:16:06Governors' Conference has
1:16:07endorsed that proposal.
1:16:09There are various
1:16:10congressmen and senators
1:16:14who have introduced
1:16:15similar budget limitation
1:16:17amendments in congress.
1:16:20So I think that there is a
1:16:21strong chance that we have
1:16:23a movement underway which
1:16:26will give people something
1:16:27to vote for that they
1:16:29think will be effective
1:16:31over and beyond voting for
1:16:32particular individuals.
1:16:34Dr. Friedman, part of the
1:16:35twofold cure you suggested
1:16:37tonight would be a
1:16:38reduction of government
1:16:39spending. What areas of
1:16:41government spending would
1:16:42you suggest are most
1:16:43amenable to reduction?
1:16:44Every area...I think that
1:16:47the only way to reduce
1:16:48government spending is
1:16:49across the board, cut
1:16:51every single appropriation
1:16:54first year by 10 percent,
1:16:56the next year by 20
1:16:57percent, and just keep
1:16:58going. Why do you want to
1:17:00choose? The reason I asked
1:17:02that is because it seems
1:17:03to me that higher
1:17:05unemployment is a
1:17:06short-term side effect of
1:17:07your inflation cure. Then
1:17:08welfare costs are going to
1:17:09go up as a result. Well
1:17:11that depends, you see the
1:17:13problem you are raising is
1:17:14the following one. Every
1:17:16one of us would like to
1:17:18reform a program but if
1:17:20you try to achieve a
1:17:22reduction in spending via
1:17:24reform you won't get it.
1:17:26But if you first achieve a
1:17:27reduction in spending
1:17:28through across the board
1:17:30cuts- that will force you
1:17:32to engage in the kind of
1:17:33reform you're talking
1:17:34about. And I quite agree
1:17:35with you. I don't think
1:17:37we need to spend more
1:17:38money on welfare, not at
1:17:40all. If we had a more
1:17:41sensible welfare system we
1:17:43would spend less and yet
1:17:44give help where it's
1:17:45really needed. The welfare
1:17:47system today does not help
1:17:49the people who really need
1:17:50it. If you take the total
1:17:52amount of money which the
1:17:54government is now spending
1:17:55on programs labeled as
1:17:57poverty programs to help
1:17:58the poor and count how
1:18:00much that amounts to for
1:18:01each person who is
1:18:02designated as poor, it
1:18:03turns out that if they
1:18:04were getting it they would
1:18:05be among the rich people
1:18:06in this country. But of
1:18:09course they aren't getting
1:18:10it; it's going to lots of
1:18:12other people. So I agree
1:18:14with you that a temporary
1:18:17increase in unemployment
1:18:18in the process of curing
1:18:21inflation might very well
1:18:23cause an increase in some
1:18:25kinds of expenditures on
1:18:27the welfare side, but I
1:18:29think that is not
1:18:30inconsistent with cutting
1:18:31expenditures in general.
1:18:34Also, what is your opinion
1:18:35of consumer protection
1:18:36legislation as it affects
1:18:38economic freedom? Well,
1:18:39most consumer protection
1:18:41legislation is not
1:18:42consumer protection
1:18:43legislation. It's the
1:18:45enacting into the laws of
1:18:47the prejudices of a small
1:18:49group of people who have
1:18:50organized themselves into
1:18:52an effective lobbying
1:18:53group. Is the consumer
1:18:55really being protected, by
1:18:57having somebody else
1:18:58decide for him whether he
1:18:59may use saccharin or not?
1:19:01He's not being protected;
1:19:02he's being hurt.
1:19:08The most anti-consumer
1:19:09measures on the books that
1:19:11have been taken in recent
1:19:13months have been the
1:19:15imposition of quotas or
1:19:18their equivalent,
1:19:19voluntary restraints, on
1:19:20the imports of TVs from
1:19:22Japan and of shoes from I
1:19:25think it was Taiwan. Did
1:19:28you hear any of these
1:19:29consumer protection
1:19:30agencies get up and
1:19:31protest about that? Where
1:19:33were they when we really
1:19:34needed them? I think the
1:19:37most effective protection
1:19:39the consumer can get is
1:19:41free competition. If you
1:19:42really want to have a
1:19:43pro-consumer protection
1:19:45move, then you ought to
1:19:47join yourself with other
1:19:49people in promoting free
1:19:51trade. (Applause) I have
1:19:58two questions. The first
1:19:59is: how detrimental do you
1:20:01believe the significant
1:20:03increase in petroleum
1:20:04products has been to the
1:20:05rates of inflation
1:20:06throughout the world? Not
1:20:07at all. The increase in
1:20:09petroleum products has been
1:20:10a negligible cause of
1:20:11higher rates of inflation.
1:20:13It's been an excuse for
1:20:15governments that have
1:20:16produced the inflation.
1:20:17After all, if petroleum
1:20:19prices are the basic cause
1:20:21of inflation, how can you
1:20:22explain the very different
1:20:24impacts on different
1:20:26countries? Here are Japan
1:20:27and Germany; they both
1:20:29import almost all of their
1:20:30oil. It should hit them
1:20:31alike. Germany went
1:20:33through with a maximum
1:20:34rate of inflation around 6
1:20:35percent; Japan got
1:20:37up to 30 percent.
1:20:39What happened is that not
1:20:41the increase in petroleum
1:20:42prices but the OPEC cartel
1:20:45and the reduction in
1:20:46availability of petroleum
1:20:47has produced a transfer of
1:20:49wealth from the rest of
1:20:51the world to the Arab
1:20:53countries; it's made us
1:20:54poorer. To a very small
1:20:56extent, insofar as it has
1:20:57made us poorer, it's had a
1:20:58slight effect on making
1:20:59prices higher. But it has
1:21:01had a very trivial effect
1:21:03on the rates of inflation.
1:21:04The second question is:
1:21:06what do you believe the
1:21:07probability might be of
1:21:09the removal of the capital
1:21:10gains tax as well as the
1:21:12removal of the double
1:21:13taxation on dividends?
1:21:15Well I think there is a
1:21:16possibility that you will
1:21:18move in both those
1:21:19directions but I think
1:21:20it's very dubious that you
1:21:21will go all the way in
1:21:22either case. I may say
1:21:27I think the more important
1:21:29point about capital gains
1:21:31is not so much about
1:21:32whether it's removed, but
1:21:33about whether the base for
1:21:35calculating capital gains
1:21:36is indexed. That's the
1:21:38really important question.
1:21:40It would be well worth
1:21:41paying the price of
1:21:43getting rid of the special
1:21:44treatment of capital gains
1:21:45if you could get the base
1:21:47of capital gains indexed,
1:21:49because the problem with
1:21:50capital gains taxation now
1:21:51is you are not taxing real
1:21:52capital gains. You are
1:21:54taxing purely paper gains
1:21:56which simply reflect
1:21:57inflation. That's part of
1:22:01the whole problem of tax
1:22:02indexation. Dr. Friedman,
1:22:05one more question about
1:22:06tax reform... And one more
1:22:08question is right, because
1:22:09we're coming to the end of
1:22:10our time. We've got one
1:22:11more gentleman there and
1:22:12we will try to handle both
1:22:13of these if we can.
1:22:14Congressman Kemp of New
1:22:16York has a proposal for a
1:22:18permanent tax cut--I don't
1:22:20know of how
1:22:21much--partially in
1:22:22emulation of President
1:22:23Kennedy in 1963, I
1:22:25believe, the idea being
1:22:27that if you cut taxes in
1:22:28times of a slowdown you
1:22:30will pick up the economy
1:22:32and perhaps even produce
1:22:33more revenue for the
1:22:34government. Now given your
1:22:35skepticism about tax
1:22:37reform, is this perhaps
1:22:38one proposal you might
1:22:39endorse? Well, I have long
1:22:41ago concluded that I am in
1:22:43favor of reducing taxes at
1:22:45any time under any
1:22:46circumstances for any
1:22:47excuse, that that's the
1:22:50only effective way to
1:22:53exert pressure on
1:22:54government spending.
1:22:56Congress will spend
1:22:57whatever the tax system
1:22:58will yield plus a good
1:23:00deal more, but that plus a
1:23:03good deal more is not
1:23:04infinitely elastic. There
1:23:05is some pressure on them
1:23:06when it gets large, and
1:23:07therefore the only
1:23:08effective way in my
1:23:10opinion, other than these
1:23:11kinds of constitutional
1:23:12amendments I was talking
1:23:13about before, of bringing
1:23:15down spending is to reduce
1:23:16taxes. So as I say I don't
1:23:19go along with Mr. Kemp's
1:23:20reasons, but I'm in favor
1:23:22of cutting taxes.
1:23:26I'm associated with the
1:23:27banking system, and I
1:23:29do... I won't hold that
1:23:30against you. ... I do have
1:23:32a line of credit and this
1:23:34relates to M2. I go in
1:23:36tomorrow and sign a piece
1:23:37of paper; the bank will
1:23:38write out a deposit ticket
1:23:40thereby the money supply
1:23:42is increased. How do you
1:23:43stop that? Oh no, the bank
1:23:45will only be able to do
1:23:46that if it can find the
1:23:47reserves and for the
1:23:48banking system as a whole,
1:23:50one bank can always get
1:23:51reserves from another
1:23:52bank. But the great
1:23:54mistake that everybody
1:23:55makes about many different
1:23:57items--it's not only
1:23:58this--is to confuse what's
1:24:01true for the individual
1:24:02with what's true for the
1:24:02society as a whole. The
1:24:04most fascinating thing
1:24:05about economics--you know
1:24:07in a way it's always an
1:24:09interesting thing about
1:24:10economics--is it's the
1:24:11most trivial subject in
1:24:12the world and yet so many
1:24:15people misunderstand it,
1:24:16and it is so hard for
1:24:17people to understand it.
1:24:18Why? I believe a major
1:24:20reason is because almost
1:24:22every interesting economic
1:24:23proposition has the
1:24:25following characteristic:
1:24:26what's true for the
1:24:27individual is the opposite
1:24:29of what's true for
1:24:30everybody together. It
1:24:32looks to you as if you can
1:24:34decide how many pieces of
1:24:35paper you carry in your
1:24:36pocket and how much cash
1:24:37you have. It looks to you
1:24:39as if you can decide how
1:24:40many deposits you have.
1:24:41It's true you can, but to
1:24:44everybody together it's a
1:24:45game of musical chairs.
1:24:47The Federal Reserve
1:24:48determines the total
1:24:49quantity of money and then
1:24:51it is shared out among the
1:24:52people. Your bank can
1:24:54increase its deposits by
1:24:56attracting reserves away
1:24:57from another bank, but
1:24:58that puts pressure on
1:24:59another bank to contract.
1:25:00The total amount of
1:25:02reserves will set a limit
1:25:03to it. Let me give you
1:25:04some other examples. It
1:25:06looks to you when you go
1:25:12to the store and you see
1:25:14an object offered for sale
1:25:16as if the price is fixed
1:25:18and the amount available
1:25:19for you to buy is
1:25:20indefinite. If you want to
1:25:22buy two pairs of shoes at
1:25:23that price, you can buy
1:25:24two pairs; three pairs,
1:25:25you can buy three pairs.
1:25:27To the whole country
1:25:28together there are a
1:25:29certain number of pairs of
1:25:30shoes available at the
1:25:31moment, and the price is
1:25:32what's free to move up or
1:25:34down to equate the number
1:25:36of pairs of shoes people
1:25:37want to buy to the pairs
1:25:38available. You try this
1:25:40out: on almost every
1:25:41proposition, what's true
1:25:43for the country as a whole
1:25:44is the opposite of what's
1:25:45true for the individual.
1:25:46And that's equally true
1:25:48with the proposition you
1:25:49are presenting. It sort of
1:25:51depends on who gets there
1:25:53first, then. Yes, it does.
1:25:54It does very much so.
1:25:55Thank you.

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