It's A Saturday Morning Bonus Podcast For 10-12-24

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Episode Transcript

Speaker 1 (00:00):
The Michael Berry Show. I don't care what you learned
in school. I don't care what you were taught, what
you've carried with you. There is nothing more important you
could have learned in school than the teachings of Milton Friedman,
my hero, my idol. These are truths, economic truths that

(00:25):
ninety nine percent of Americans will never even be exposed to.
Inflation and illegal immigration are the issues in this election.
Two economists understood inflation better than anyone, Thomas sol and

(00:47):
his mentor, Milton Friedman. Milton Friedman's greatest contributions came in
I would say monetary theory, consumption analysis, and and more
generally kind of the role of government in economic policy?
Do you say economic or economic? You say economic?

Speaker 2 (01:09):
I like to go back and forth.

Speaker 1 (01:12):
Milton Friedman is best known for his support of minimal
government intervention in the economy, his position being policies should
promote individual freedom and market efficiency. Very easy to think
government ought to come in and solve these problems, but

(01:35):
the government trying to solve the problem makes it worse.
Milton Friedman believed that with free markets minimal governmental intervention,
you would foster economic growth and personal liberty. And I'll
give you an example. When the automobile was being manufactured.

(02:00):
That scared the buggy whip business because if you were
in the buggy whip business, you're making good money manufacturing
buggy whips. All of a sudden cars come along. You're thinking, well,
that's gonna put us out of business. We're gonna lose
our job. Government needs to keep them from doing this,
because it's going to lose our job. But the greater

(02:21):
good was this new form of transportation that made life
more efficient, that reduced the amount of time it took
to travel, That reduced the amount of time it took
to get goods to people, which means reduce the cost.
It was an overall good, But sure somebody had to
suffer so that many others could prosper. But what does

(02:43):
government do? More often than not, the buggy whip folks
go hire them a lobbyist and they start protesting. The
politicians go, oh, the buggy whip people are gonna be
mad at us. Let's shut down automobiles. We've played clips
of his speeches before, and we've actually posted this one before,
and I'm going to post it again and again and

(03:04):
again and again. Try to put some time in between
it because I believe in it so much. But with
inflation being as bad as it is now, and with
people really feeling when you feel that pinch, you want
to learn more about what happened, and he does a
great job explaining it. No he's not charismatic. No he
doesn't have a great voice, but please push through that

(03:26):
and share this podcast with others. It is the sort
of thing that I wish more people understood. As always,
I love to hear from you, Michael Berryshow dot com.
Send me an email. I read them all, can't reply
to them all. You can buy our merch there, and
you can sign up for our daily Blast, where we
include links to things like this and much more. We
appreciate your support so much.

Speaker 3 (03:46):
The topic I'm going to talk about tonight, I had
thought it was announced. If not, it'll come as a
surprise to you, but I hope not as an unpleasant
surprise is a topic of money and inflation. It's not
a topic I think there's anybody in this room who
was uninterested in at least the inflation half of it.
Most of you are also very interested in the money half,

(04:07):
but from a different point of view. Whenever I talk
about inflation, I am reminded of a wonderful.

Speaker 2 (04:14):
Story about the man who decided.

Speaker 3 (04:17):
To take advantage of the growing science of cryogenics, that's
the science of freezing people up so that they can
be in deep freeze for a time and then restored
to life.

Speaker 2 (04:27):
And he got.

Speaker 3 (04:28):
Himself put into the deep freeze for a twenty year period.
And of course, before he went into the deep freeze,
he left all his securities and his worldly belongings at
his brokers, with instructions to do the best he could
for him. And twenty years later, after the deep freeze
had worked, he was unthawed and came out of the

(04:51):
deep freeze. And of course the first thing he did
was to run to the telephone to call his broker.

Speaker 2 (04:56):
And his broker said to him, will you know you're
a millionaire many times over? Oh?

Speaker 3 (05:01):
Really, said the man, what happened to this stock? And
the brokers said, had went from here to hear, you know,
multiplied many and ten times, twenty times?

Speaker 2 (05:09):
What happened to this stock?

Speaker 3 (05:10):
He kept on going, but suddenly the telephone operator interrupted.

Speaker 2 (05:15):
The man was just ecstatic.

Speaker 3 (05:17):
Telephone operator interrupted and said, sorry, your three minutes are up,
That'll be two hundred and fifty thousand dollars for.

Speaker 2 (05:23):
The next three minutes. Place.

Speaker 3 (05:33):
That's real inflation. That's a that's at the moment of story,
but it's not a story which does not have some
examples in history. Inflation is a disease. It's a dangerous

(05:53):
disease for a society. It is sometimes a fatal disease
for a society.

Speaker 2 (06:00):
It's a disease that.

Speaker 3 (06:02):
If allowed to rage unchecked, can destroy a society.

Speaker 2 (06:06):
And we have many such examples.

Speaker 3 (06:09):
The classic examples, of course, are the extreme examples of Germany,
of Austria, of Russia after the First World War, when
inflation really did reach levels at which the kind of
apocryphal story I told you was a literal description of

(06:31):
the reality. When inflation reached levels at which employers would
pay their workers three times a day after breakfast, lunch,
and dinner so they could go out and spend the
money before it lost all its value. That's the real
extreme cases. But you don't have to go to such
extreme cases to see the enormous harm which inflation left

(06:56):
unchecked can do. You have the exam in many examples
in South America, Brazil before nineteen sixty four was brought
down by an inflation that led to a revolution that
toppled the existing government in order to stem the inflation.
In the famous case of Chile, with mister Ayendi in power,

(07:21):
he produced an inflation which was one of the major
factors that caused the economic catastrophe that led to the
replacement of his government by a military dictatorship. We are
nowhere near that stage in the United States, but it
behooves us as a nation to pay attention to this disease,

(07:42):
to ask ourselves, what is the cause of the disease,
how do you cure the disease, what are the effects
of the cure, what are the side effects of it?

Speaker 2 (07:56):
And what will happen if we don't cure it?

Speaker 3 (07:58):
And I propose to discuss the topic tonight under those headings,
and then go on to consider in somewhat more specific
detail the experience of the United States over the past
decade or two and the present situation that we face.

Speaker 2 (08:18):
Now.

Speaker 3 (08:18):
The first step toward understanding the cause of inflation is
to recognize that it is always in everywhere a monetary phenomenon.
It's always an everywhere a result of too much money
of a more rapid increase in the quantity of money

(08:41):
than an output. Moreover, in the modern era, the important
next step is to recognize that today governments control the
quantity of money, so that as a result, inflation in
the United States is made in Washington and nowhere else.

(09:03):
Of Course, no government, any more than any one of us,
likes to take responsibility for bad things. Where all of
us human. If something bad happens, it wasn't our fault,
and the government is the same way, so it doesn't
accept responsibility for inflation. If you listen to people in

(09:24):
Washington talk, they will tell you that inflation is produced
by greedy businessmen, or it's produced by grasping unions, or
it's produced by spendthrift consumers, or maybe it's those terrible
Arab sheeks who are producing. Now, of course, businessmen are greedy,

(09:45):
who of us isn't. Trade unions are grasping who of
us isn't. And there's no doubt that the consumer is
a spendthrift. At least every man knows that about his wife.
But none of them produce inflation for the very simple
reason that neither the businessman, nor the trade union, nor

(10:08):
the housewife has a printing press in their basement on
which they can turn out those green pieces of paper
we call money. Only Washington has that printing press, and
therefore only Washington can produce inflation.

Speaker 2 (10:25):
If you listen to the people from the.

Speaker 3 (10:27):
Communist world, they'll tell you inflation is a capitalist phenomenon.

Speaker 2 (10:33):
That's not true. If you look at Europe today.

Speaker 3 (10:37):
One of the most rapid rates of inflation in Europe
has been in Yugoslavia, which is a communist country. One
of the slowest rates of inflation has been in Switzerland,
which is a capitalist country. So inflation is not a
capitalist phenomenon, but neither is it a communist phenomenon. If

(10:58):
Switzerland has low en inflation, the United Kingdom in recent
years has had inflation rates running up to twenty twenty
five percent a year. Italy has inflation rates today of
that order of magnitude. Inflation is not a capitalist phenomenon,
it's not a communist phenomenon. It's a printing press phenomenon. Now,

(11:20):
in saying that inflation is a printing press phenomenon, in
saying that inflation is always caused by a more rapid
increase in the quantity of money than an output. You're
only at the beginning of the problem because you must
distinguish the immediate cause from the more element cause. You

(11:42):
must ask why is it that the quantity of money
increases too rapidly? But before I go on to that question,
I just want to settle for once and for all,
the point that inflation is a monetary phenomenon. That proposition
has been documented over and over again. We have evidence,
for the United States for over one hundred years, for

(12:04):
Great Britain for two hundred years, for Sweden for two
hundred years. There is never in history been an inflation
that was not accompanied by an extremely rapid increase in
the quantity of money. There is never in history been
an extremely rapid increase in the quantity of money without
an inflation.

Speaker 2 (12:22):
But in order to persuade.

Speaker 3 (12:24):
You of this quickly and with a minimum waste of time,
I have brought a few pictures along to show you
that will graphically illustrate the proposition about the relation between
money and inflation. And I'd like to if we can
start with the first of those slides. Now, maybe you

(12:44):
can make out that there are two lines on that chart.
That chart is for the United States, and it covers
the thirteen years from nineteen sixty four through nineteen seventy six,
and one of those charts, the solid line is a

(13:05):
quantity of money per unit of output, and the other line,
which is a dashed line, is a consumer price index.
Those two lines cross at nineteen seventy because that's the
way they're constructed. Both of those series were expressed on
nineteen seventy as a base of one hundred in order

(13:26):
to try to get the two series in the same scale.
But there is nothing whatsoever in the arithmetic of it
to make those two curves the same elsewhere that and
I may say that the quantity of money that's plotted
there is a quantity of money for a year ending

(13:46):
six months before the price index, so that you are not.

Speaker 2 (13:53):
There's nothing funny about that.

Speaker 3 (13:56):
And you can see that the two lines are almost indistinguishable. Now,
I've got a segment of thirteen years up there, but
if I had a segment of one hundred years, the
relationship would be the same way throughout the whole of
that period.

Speaker 2 (14:11):
But you may say.

Speaker 3 (14:12):
That's maybe that's only for the United States, but what
about other countries? And so let's have the next slide
The next slide is for Germany for the same period,
and again you will see the same story.

Speaker 2 (14:28):
Now, the interesting thing here is that you can see
that the.

Speaker 3 (14:31):
Quantity of money for a while in the later sick
later in the seventies, was running ahead of the price index.
But now they're coming back together again. And that's a
behavior you very often observe. The quantity of money per
unit of output is the major factor that from the

(14:51):
immediate sense, determines a price index, but it doesn't operate instantaneously.
Sometimes there are delays of a year or two, but
sooner or l.

Speaker 2 (15:00):
They all come back together.

Speaker 3 (15:02):
Well, the United States in Germany are very similar countries.

Speaker 2 (15:05):
What about another country.

Speaker 3 (15:07):
Let's have the third chart, and the third chart there
it's supposed to be for Japan.

Speaker 2 (15:13):
I can't read it. Is that what it says up there,
that's for Japan.

Speaker 3 (15:19):
And you will notice that the Japan experienced a much
greater price rise than either the United States or Germany did.
But Japan has now been coming back. It's done a
remarkable job of controlling the quantity of money, and as
a result, the rate of price inflation in Japan has
come down from close to thirty percent a year to word. Today,

(15:41):
in the period after this chart, it's back down to
about seven percent. But again you have the same synchronism
between the two charts. Now the next chart, let's have
the next chart, which is for Great Britain.

Speaker 2 (15:57):
You can see each.

Speaker 3 (15:58):
One of these has a little bit more fflation than
the preceding one, but each one of them you again
have the same relationship in every case between the quantity
of money and prices. Now, one of the interesting things
about that comparison between Japan and the United Kingdom is
you will hear many people telling you that the real
reason you have inflation is because of trade unions. If

(16:21):
you listen to anybody telling you about Great Britain's plight,
they will tell you that the real problem in Great
Britain is that you have such strong trade unions that
they push up wages and that causes inflation. Well, if
that explains this relationship for Britain, what explains the previous
chart for Japan, where trade unions are not very important

(16:43):
are much weaker than they are in Great Britain. Or
what explains the next chart, which is a honey for Brazil.
That's can we have the last chart now, that's a
little that's an inflation, that's really an inflation, and that's
none of these baby inflations we've been playing with. Of course,

(17:06):
there are still better ones in Argentina and Chile, but
we don't have a big enough.

Speaker 2 (17:11):
Room now here.

Speaker 3 (17:14):
Again, if trade unions cause inflation, as you know, Brazil
has a military government and trade unions have absolutely nothing
to say about anything except as they are branches of
the government apparatus. So that it's clear you cannot explain
in the case of Brazil, the inflation trade unions, but

(17:37):
you can see very clearly that you can explain it
by changes in the quantity of money. Thank you, We
can have the lights back on now. As I say,
that's a very small sample of the evidence that is
available on the linkage between the quantity of money on

(17:58):
the one hand.

Speaker 2 (17:58):
And prices on the other.

Speaker 3 (18:00):
That evidence is available for hundreds of years in many countries,
and there are no exceptions.

Speaker 2 (18:07):
But that only gets you to first base. The question
is why is it.

Speaker 3 (18:14):
That the quantity of money increases relative to output? If
you go back one hundred years ago, and here in
California this is very appropriate to go back a little
more than one hundred years ago. Sometimes the quantity of
money increased more rapidly than output because of discoveries of
gold or precious metals.

Speaker 2 (18:35):
As you know, you had.

Speaker 3 (18:37):
The gold rush in California in late eighteen forties early
eighteen fifties. You had the Australian gold discoveries in the
same period in eighteen fifties, and you had a worldwide
inflation as a result. In the eighteen nineties to nineteen thirteen,
you had a worldwide inflation because of the disc of

(18:58):
the perfection of the Cyanide process for extracting gold from
low grade ore, which produced an outpouring of gold from
Australia from South Africa to supplement the gold strikes up
in Alaska.

Speaker 2 (19:14):
But those were the good old days, before the.

Speaker 3 (19:17):
Days when governments discovered that it could escape from that
relic of an earlier time, the discipline of gold, and
that it had a much more scientific method of controlling
the quantity of money by ending the link to gold
and instead turning to government dominated money. And today you

(19:41):
do not have inflations for those reasons. Today you have
inflations because governments create a very large.

Speaker 2 (19:51):
Quantity of money. The question is why do governments do
that in today.

Speaker 3 (19:56):
In the main, there are fundamentally three reasons, in my opinion,
why we have experienced inflation and why it is a threat.
The first, and by far the most important, is in
order to pay for government spending. Now, of course I

(20:19):
say the government does this, that's wrong. The government doesn't
do it.

Speaker 2 (20:24):
You do it. I do it, We the citizen do it.

Speaker 3 (20:28):
We tell the people in Washington, we tell our congressmen
and our senators and our representatives.

Speaker 2 (20:33):
We want you to spend more money on.

Speaker 3 (20:35):
Us, but we don't want you to put any taxes
on us. Oh no, we don't want you to levy taxes.

Speaker 2 (20:42):
We want you to.

Speaker 3 (20:42):
Spend more, but we don't want you to tax more.
There's no way you can do the one without the other.
The real tax on the American people is what government spends.
If government spends four hundredth's, the federal government spends four
hundred and fifty billion dollars and only raises four hundred

(21:03):
billion dollars in taxes. Who do you spose who pays
that other fifty billion dollars? Do you suppose the tooth fairy?

Speaker 2 (21:11):
Does you pay it? And I pay it?

Speaker 3 (21:19):
And one of the ways we pay it is by
the tax which we call inflation. Inflation is, from this
point of view, a form of taxation. If government spends
more than it takes in in the form of things
that are called taxes, it has to meet the difference,
either by printing money or by borrowing from the public

(21:43):
at large. Printing money is a very attractive device, because inflation,
from the point of view of a person sitting in
Congress or in the Senate, is a wonderful tax.

Speaker 2 (21:59):
He does not have to vote for it.

Speaker 3 (22:02):
Have you ever known of a congressman who got up
and said, I vote to impose a tax in the
form of inflation of ten percent next year, No, sirree.
Inflation is a tax which is imposed without representation, in
which nobody has to vote for. And of course it's

(22:22):
a marvelous tax from the point of view of a
congressman trying to meet the demands of his constituents for
more spending. Inflation is its taxation yields tax.

Speaker 2 (22:37):
Revenue in three different ways. It yields it directly.

Speaker 3 (22:43):
We think of these pieces of paper we carry in
our pockets money, but it would be just as accurate
to think of those as receipts for the taxes you've paid.
If you pay the government one hundred dollars directly in taxes,
the government sends you back receipt you paid as one
hundred dollars in taxes. Well, now, the beauty of printing

(23:04):
money is that the receipt is right straight with the
payment of taxes. What you're getting there is not money
but tax receipts. And from the point of view of
the government, those pieces of paper, and I'm exaggerating, of course,
they are not really pieces of paper. That's only the
primitive way of doing it. In our modern age we

(23:25):
do it in a more sophisticated way through using a
bookkeeper's pen or a computer instead of having to turn
the printing press. It's in the form called deposits, one
of the most misleading terms in the human language. When
I think of a deposit, I think I put something there,
and there it is. But you know, when you go
into a bank and deposit money, the people behind the

(23:48):
counter run as fast as they can to another part
of the bank to pay it out over another counter
in the form.

Speaker 2 (23:52):
Of loans, it's not deposited there.

Speaker 3 (23:57):
And similarly, when the government sends a check, it may
in effect be doing the equivalent of printing paper money.
I won't go into the details of that process. You
will get the right answer if you think of it
strictly as printing paper money.

Speaker 2 (24:20):
So when the.

Speaker 3 (24:23):
Government gets revenue from inflation directly in the form of
these pieces of paper, it can go out and spend
without having gotten taxes from anybody.

Speaker 2 (24:32):
But it also gets revenue in two other ways.

Speaker 3 (24:36):
In the first place, with the kind of tax system
we have, inflation raises other kinds of taxes without anybody
having to vote for it. You might think that if
prices go up by ten percent and your income goes
up by ten percent, you're in the same position as
you were before, but you're not pushed up into higher

(25:01):
brackets of the income tax. And on the average if
your income, if prices go up ten percent and your
income goes up ten percent, your taxes will go up
fifteen percent, So that the Congress again is in a
marvelous position it can vote to lower tax rates when

(25:21):
in fact taxes are going up. There's a lot of
talk in the papers these days and the news these
days about the President proposing a tax cut next year.

Speaker 2 (25:33):
That's pure fiction. Nobody is proposing a tax cut.

Speaker 3 (25:37):
These much publicized tax cuts of the past few years
have not been tax cuts at all. Inflation has raised taxes,
and the so called tax cuts is given back a
small part of that to the taxpayer, but the actual
taxes the taxpayers have paid have gone up as a

(25:58):
result of the automatic effect of inflation. In the third place,
the government gets revenue from inflation by repudiating its debt.

Speaker 2 (26:11):
Many people keep.

Speaker 3 (26:12):
Worrying about the government debt. That's not something you should
worry about because the government debt today is smaller the
official that is, the announced government debt, the open and
above board government debt, bonds outstanding and the like is
smaller as a percentage of the national income than it

(26:34):
was twenty thirty years ago. How can that happen? Every
year we have deficits, How can the debt be going down?
Because those are not real deficits. They are deficits that
have been financed by inflation. Anybody who has bought government

(26:55):
securities in the past ten years has paid the government
for the privilege of lending to it. Anybody who has
bought a long term government bond and then redeemed it
has gotten back an amount of money which has less
purchasing power, less power, less ability to buy goods and

(27:17):
services than the sum he initially paid for the bond.
And to add insult to injury, he's had to pay
taxes on what they call interest, and as a result,
the debt has gone down in meaningful terms, So that
inflation is a marvelous resource for a government in all

(27:40):
three of these ways. That, as I think, has been
the main reason throughout history, not only now, but going
back for thousands of years. You know, you had a
great inflation during the time of the Roman Empire when
Diocletian was emperor.

Speaker 2 (28:00):
He did it in a different way.

Speaker 3 (28:03):
He did it by taking nice, good, full bodied silver
coins and replacing the silver by an ally that was
worthless until there was less and less silver until one
of the history books talks about the ancient denarius, which
used to be a full bodied silver coin, finally having

(28:23):
become in Diocletian's era little more than a copper coin.

Speaker 2 (28:28):
With a wash of silver.

Speaker 3 (28:30):
Now, I happened to come across that quotation the same
year in which the American Treasury was replacing our full
bodied silver coin by a copper coin with not even
a wash of silver only of nickel. History does repeat itself,

(28:51):
so that's been always throughout history a major reason why
you have had creation of money to finance government expenditures.

Speaker 2 (28:59):
But we've had another.

Speaker 3 (29:00):
Reason in these days, and that's allegedly to promote full employment.
In the post war world. After World War Two, every
country in the West has had a full employment policy,
which means not that we've had full employment. On the contrary,
as you know, we've been having increasing unemployment in recent years,

(29:23):
but that every time for quite a period there was
a threat of unemployment or unemployment started to rise, there
was a strong tendency by government to say, we've.

Speaker 2 (29:33):
Got to do something about this.

Speaker 3 (29:35):
We have to print more money, we have to spend
more money, we have to stimulate the economy, the result
of which has been to create an increased quantity of
money that in the first instance has had some favorable
effects on employment, but only temporarily, only so long as
you could fool the people, and then when people got

(29:58):
onto what was going on, it came out in the
form of inflation. In the United States, we've also had,
and in most countries, a third, less important factor that
has contributed to excess of increases in the quantity of money,
and that has been mistaken policies by the central bank.

(30:19):
Professor Seekin referred to the mistake of the Federal Reserve
Bank in the nineteen late twenties early thirties. From nineteen
twenty nine to nineteen thirty three, the quantity of money
in the United States went down by a third, and
that was a major factor that produced the catastrophe. That

(30:41):
was a great mistake of the Federal Reserve. It learned
from that mistake. Government agencies, like people, don't always.

Speaker 2 (30:49):
Make the same mistake.

Speaker 3 (30:50):
The next time, they make a different one, and since
that period, the central banks have tended to make the
mistake in the opposite direction. Has almost always been caused
by confusing their function by thinking that they had something
to do with interest rates, instead of recognizing that their

(31:10):
real function was to control the quantity of money. Now,
most of you will be inclined to say, well, that's
all very well, but.

Speaker 2 (31:21):
Aren't there some important things you've left out?

Speaker 3 (31:25):
Of course, the most obvious thing you would have told
me I left out was trade union behavior. But I
hope I've already persuaded you that that's not a fundamental
source of inflation. Trade unions may do a great deal
of harm in a great many ways. Trade unions have
done Britain enormous harm, but they are not responsible for

(31:47):
Britain's inflation. Higher wages are in the main a consequence
of inflation and not a cause of it.

Speaker 2 (31:54):
And as I say, the.

Speaker 3 (31:55):
Examples of these charts I gave you before, I hope
will show that anybody who thinks that's the fundamental cause
of inflation had better pause for a bit. But there
are two other factors that people are inclined to site.
One is to say, what about international influences. The government

(32:16):
is particularly fond of citing this, to say, oh, well,
you mustn't blame us for inflation. We've imported it from abroad.
There's a worldwide inflation, and how can you expect the
United States to stay clear of inflation of all the
rest of the countries of the world are inflating. Now,
that was a valid explanation before nineteen seventy one, when

(32:41):
we had a worldwide system of fixed exchange rates. In
that case, it is true that inflation in one country
would tend to spill over into another, because it would
influence a quantity of money. In that case, it was
inflation in America that produced in the United States have

(33:01):
produced inflation in many countries around the world because they're
currencies were.

Speaker 2 (33:08):
Linked through a fixed exchange rate with ours.

Speaker 3 (33:11):
But today that explanation is not valid as long as
countries have variable, floating, flexible exchange rates between their currencies.
Inflation is a national phenomenon and not an international phenomenon.

Speaker 2 (33:27):
And the proof of that is very simple.

Speaker 3 (33:30):
If inflation is a worldwide phenomenon, if it's a I'm sorry,
inflation is a worldwide phenomenon, but it's not an international phenomenon.
You know, in every country of the world you have
too high taxes, But high taxation is not an international phenomenon.
It's just that all the nations of the world do
it at the same time in the same way. You

(33:53):
have inflation in many countries. But if it were an
international phenomenon, how come it's roughly zero to one percent,
four to five or six percent in Germany, ten percent
in France, eighteen percent in Great Britain, may be higher
than that in Italy, and so on down the line. No,

(34:13):
inflation is a national phenomenon produced by monetary policy. And
other policies within the countries. Now, the second argument that
will be made, you've left out of this picture productivity
in those charts. What was it that I connected with prices?

(34:34):
It was not simply the quantity of money. It was
a quantity of money per unit of output. And it's
true anything that increases output will tend to hold down prices.
And so it's very common for people to say, well,
the real source of inflation is that our productivity has

(34:55):
not been increasing as much as it should, or to
say that the real cure for inflam is to increase productivity. Now,
productivity is an enormously important phenomenon from the point of
view of our standard of life, of how well we live,
there's nothing that's more important. If we can get a
rate of real growth of three percent instead of two percent,

(35:19):
that will make a great difference over a period of time.
And I don't doubt that one of our national problems
is a fall off in the growth in productivity. But
from the point of view of inflation, it's the wrong
order of magnitude. It would be a tremendous achievement to
raise the average rate of growth of real output in

(35:41):
this country from three percent a year to four percent
a year. That would be a thirty three and a
third percent increase. It would be a dramatic change, but
it would reduce the rate of inflation by one percentage
point a year. And from that point of view, the
possible variations in the quantity of money are much greater

(36:02):
than the variations in output and productivity. So from the
point of view of inflation, productivity is very much of
a bit actor on the stage, the lead, the hero
or the villain.

Speaker 2 (36:17):
As you wish.

Speaker 3 (36:18):
It is not productivity, but what happens to the quantity
of money? Now so much for the cause of inflation.
It's very easy to say what the cure is. There's
no problem how to stop inflation. That's the easiest thing
in the world to say. In order to stop inflation,

(36:39):
you have to have the government spend less and print less.
That's the only way you're going to stop inflation. That's
the one and only cure. But you know, the real
problem isn't to know how to cure inflation. The real
problem is to have the political will to do so.

(36:59):
If I may go back to my medical analogy. Some
years ago, my physician told me about a young man
who was a patient of his who had a debilitating
disease as a result of which is fingers were threatening
to fall off, his toes were threatening to fall off.
And my physician said, you know, that young man could
be cured in no time. The only thing he has

(37:21):
to do to be cured is to stop smoking. But
I cannot in any way bring him to stop smoking.

Speaker 2 (37:28):
He refuses to do it.

Speaker 3 (37:31):
Now, the disease was curable in one sense, but it
was not easy to do it. An analogy that in
some ways is much closer to the problem of inflation.
It's a very literal analogy, but also something of a
medical analogy is alcoholism. The thing about alcoholism is that
when you go out on a toot, the good effects

(37:54):
come first, and the bad effects only come the next
morning when you have the hangover. Now, that's exactly the
way it is with inflation. When you start inflating, the
good effects come first. After all, the government sprinting money,
everybody thinks he's richer, he's got all these pieces of paper.

(38:15):
And initially it does have that effect. It makes business good,
it expands output. It's only after a while, when it
works its way through to inflation that the bad effects
come later, and you then have inflation. Similarly, on the
other side, the great problem in curing an alcoholic is

(38:40):
that the bad effects come first and the good effects
come later when you try to cure it.

Speaker 2 (38:46):
If a man who has been subject to.

Speaker 3 (38:50):
Craving for alcohol goes off the wig, and it's terrible,
he's got a terrible time getting rid of his craving.
But if he wants can succeed in doing so, everything
will be fine. It's exactly the same thing with inflation.

Speaker 2 (39:07):
If you.

Speaker 3 (39:10):
First, if you succeed in slowing down inflation, you will initially.

Speaker 2 (39:15):
Have some very difficult times.

Speaker 3 (39:18):
Just as inflating stimulates the economy temporarily, so slowing down
inflation slows down the economy temporarily. A more direct reason
why it's difficult to apply the cure is because it's
not so clear that people want to stop inflation. If

(39:42):
I ask people, are you in favor of inflation or not?
Everybody's against inflation. But when I explore a little bit further,
if I say to people, tell me, have you gained
from inflation?

Speaker 2 (39:54):
Oh? No, you say, I haven't gained.

Speaker 3 (39:57):
And yet the fact is that a great many people
have gained from inflation.

Speaker 2 (40:01):
There are many, many people who have benefited.

Speaker 3 (40:04):
Of course, the major gainer from inflation is a federal treasury,
as I've already said, but almost everybody who has bought
a home in the past thirty years has gained from inflation.

Speaker 2 (40:15):
He was able to borrow on a.

Speaker 3 (40:17):
Mortgage, which inflation is paid off along with paying off
the government debt, so that almost all homeowners in this
country are beneficiaries from inflation. Indeed, one of the things
that makes inflation such a bad social disease is precisely

(40:38):
that it tends to be divisive, because some people do
very well during an inflation period and some people do
very badly, and as a result, the population gets split
into people who are seeming in great prosperity and people
who are in great distress. When most people say they

(40:59):
want want to stop inflation, what they mean is that
they want the prices of the things they buy to
go down and the prices of the things they sell
to go up. But since what one man sells is
what another man buys, that's a neat trick if you

(41:19):
can do it, And as a result, people aren't really
serious when they say they want to stop inflation. Certainly,
not in the early stages, not before they fully understand,
not before it's gotten to the point where it is
really creating serious social problems. Everybody wants to stop inflation

(41:40):
at somebody else's expense. Now, I've already said that if
you start to cure inflation, you will get some bad effects. First,
let me emphasize that those bad effects are not themselves
a cure. There are side effects of a cure. If

(42:03):
you have your appendix out, if you go to a
doctor and say, and he says you have appendicitis, you've
got to take your appendix out. But after your appendix
is out, you'll have to stay in bed. It used
to be two weeks, now it's ten minutes. But you'll
have to stay in bed for a little bit. And
you say to him, well, you know, I think I'll
just stay in bed and not have the operation.

Speaker 2 (42:26):
That isn't going to cure you.

Speaker 3 (42:29):
And in the same way, unemployment is not a cure
for inflation. I can tell you one hundred ways to
create unemployment that will produce more.

Speaker 2 (42:39):
Inflation, not less.

Speaker 3 (42:42):
I may say that used to be a proposition that
people found it difficult to understand, but the experience of
the past ten years or so has done a great
deal to make people understand that it's perfectly possible to
have unemployment and inflation go along simultaneous. In fact, we've
coined some ugly new words like stagflation and slumpflation to

(43:06):
try to explain this phenomenon, or I shouldn't say.

Speaker 2 (43:09):
To explain it, to name it.

Speaker 3 (43:13):
So, unemployment is not a cure for inflation, but it
is an almost inevitable side.

Speaker 2 (43:21):
Effect of an effective cure. Now why should that be.

Speaker 3 (43:27):
Why is it that there seems to be no way
to cure inflation without going through at least a temporary
period of relatively slow growth and relatively high unemployment.

Speaker 2 (43:41):
The answer is.

Speaker 3 (43:44):
Fundamentally because of the time delays between the turning of
the printing press and the element effects on output and
on prices. Both ways you produce the same result. Look
on the upgrade. Suppose the government first prints money and

(44:05):
spends it to pay for its expenses. To begin with,
the people who find themselves doing better business.

Speaker 2 (44:15):
Don't know what, don't know what.

Speaker 3 (44:16):
The explanation is, government is paying more money, its employees
have better salaries. They're coming to the store and buying
more goods. The storekeeper is delighted to sell them at
the same prices as before. Each man thinks this is
something special happening to him. The shoe manufacturer says, uh, look, I.

Speaker 2 (44:36):
Can sell more shoes. The demand for shoes is going up.

Speaker 3 (44:39):
He doesn't recognize that what's really happening is the demand
is going up everywhere. And then not only is the
demand for shoes going up, but he's gonna have to
pay more to get labor. He's gonna have to get
paid more to get leather, he's gonna have to pay
more to produce his products. But when that shows up,
when after a while he finds out that his costs

(45:01):
are up, then he suddenly discovers that he has to
raise his prices to make both ends meet. And that's why,
on the average in the United States over the past
hundred years, an increase in the quantity of money has
taken about five or six months to affect people spending.
The first thing that happened is people just have bigger

(45:21):
bank accounts. Then it takes them a little while to
realize that and they start spending it, and then it's
another twelve to eighteen months before that works.

Speaker 2 (45:32):
Through into prices.

Speaker 3 (45:34):
So on the average over the past hundred years, and
in the.

Speaker 2 (45:39):
Britain it's been for two hundred years.

Speaker 3 (45:41):
I say one hundred years, because that's as far back
as our data go. In the United States, there's been
about a two year interval between a more rapid increase
in the quantity of money on the one hand and
the inflationary effects of it on the other. But the
same thing happens the other way. If the government slows

(46:01):
down it's spending in the first instance. People simply experience
that as slower demand for their products, and they tend
to retrench. They tend to say, well, my inventories are
going up, I better cut back production. It's only after
a considerable interval that that's reflected in lower prices or

(46:23):
in a slower rate of increase in prices, and works
its way through. So there is no way that I
know to avoid the interim effect of slowing down inflation.
In the long run, there is no relation between inflation and.

Speaker 2 (46:44):
Unemployment on the average.

Speaker 3 (46:48):
Suppose a country gets accustomed to ten percent inflation, that's
perfectly livable. That's something people can get along with. What
will happen, everybody will know that it's going going on.
All wages will automatically tend to go up by ten
percent more a year than.

Speaker 2 (47:03):
They otherwise would.

Speaker 3 (47:05):
All prices will tend to go up by ten percent more.
Instead of interest rates being five percent, they will be
fifteen percent. Everything will get adjusted to it, and then
we have a great deal of evidence that the average
rate of inflation over a period of time has no
relationship at all with the average rate of growth or

(47:27):
the average level of unemployment. The thing is that only
surprises matter. It isn't inflation that produces a stimulus. It's
only higher inflation than you expected.

Speaker 2 (47:43):
It's only the surprise.

Speaker 3 (47:45):
If you get adjusted to it, it doesn't do any good.

Speaker 2 (47:48):
It's just like again alcoholism and drug addiction.

Speaker 3 (47:52):
When a fella first gets started on drinking, all it
takes is one drink make him happy. But after his
body gets adjusted to that, it takes a little more,
and pretty soon he's taking a half a bottle.

Speaker 2 (48:08):
Similarly, with drugs, it takes bigger.

Speaker 3 (48:11):
And bigger doses to have the same effect, and similarly
with inflation, As a country gets accustomed to higher and
higher rates of inflation, it needs a bigger dose to
have any stimulating effect. So in the long run there
is no relation, but in the short run there certainly is.

(48:31):
There's no way to avoid these side effects, but those
side effects can be minimized by trying to take the
cure gradually instead of overnight. Here we are in this
nation with a base rate of inflation at the moment
somewhere around seven percent. It would be a mistake to

(48:54):
try to bring that down to zero next year. We
ought to do it over a three or four year
period to give people a chance to with just We
can also minimize the side effects of inflation, in my opinion,
by adopting a widespread program of escalator clauses, particularly with
respect to government obligations, particularly with respect to taxes. I

(49:19):
think it is a disgrace, in a scandal, that we
have not had a legislation which has adjusted the income
tax system so that inflation does not automatically raise rates.
Congress has been very quick to index its own salaries.

(49:39):
Congress has been very quick to index the salaries of
government employees, but it has been very reluctant to apply
the same principle to the taxes that it imposes on
the citizen. I must say myself have a I would
go the other way. I would like to see the

(50:01):
taxes indexed, and with respect of the salaries of Congress
and of government officials, I would index them perversely. Every
five percent inflation is a five percent reduction in their salary.
And I assure you if you did that, you'd cure
inflation real fast. One more general point, what if we

(50:23):
don't cure inflation.

Speaker 2 (50:25):
We have no good choices.

Speaker 3 (50:30):
If we don't cure inflation, if we continue at high
rates of inflation, will also have high unemployment. One of
the main reasons is because of the false cures that
will be attempted. In every country that has had great inflation,
the governments have resorted sooner or later to wage and
price controls, supposedly as an attempt to cure inflation. We

(50:55):
did that in this country in nineteen seventy one, with
disastrous results. Wage and price controls are not a cure
for inflation. In fact, wage and price controls, you will find,
are imposed by governments that want to inflate but want
to conceal it from the populace. Governments want to get

(51:15):
a short term benefit by pumping up the economy, but
they want the populace to think they're doing something about inflation.
So they announced with great fanfare that they're fixing prices
and wages. But the result is only to hold down,
to conceal the inflation for a year or two, and
then have it blow up, which is of course exactly

(51:37):
what happened in nineteen After nineteen seventy one. In light
of this background, I come to the final point I
want to make. I think it's very instructive to look
at recent US history. Our inflation really started in the
post war period in the nineteen fifties. In the nineteen
fifties we started to have We first had a very

(51:59):
substantial inflation during the Korean War, and then after that
was over, we had a creeping inflation. It was an
accident that that nineteen fifties inflation didn't continue and grow
from that point on.

Speaker 2 (52:19):
But we had a political accident.

Speaker 3 (52:21):
We had a non political president who was willing to
risk the re election the election of his vice president
in order to stop the inflation. Mister Eisenhower was willing
to take the unpopular measures that stopped inflation, that put

(52:43):
us back on a non inflationary source. By approving measures,
it led to a series of recessions in nineteen fifty
eight and then in nineteen sixty by holding down government spending,
holding down government money creation, so that from an inflation rate.

Speaker 2 (53:04):
Which at that time was regarded as.

Speaker 3 (53:06):
Terrible of three three and a half percent, it was
brought back to essentially zero. Our real inflation started in
the early nineteen sixties when John F. Kennedy inherited this
windfall of a non inflationary environment as a result of

(53:26):
President Eisenhower's policies, and from nineteen sixty on we have
been on a roller coaster. We have been going up
in inflation, we have been coming down. We've been going up,
and we've been coming down. Every time we go up,
there's a great outcry we have to do something about
stopping inflation, and so we tend to step on the brakes.

Speaker 2 (53:47):
That tends to produce a downturn.

Speaker 3 (53:48):
But the moment on employment starts going up, there's an
even bigger outcry. We have to do something about the unemployment.
So we reverse and step on the accelerator instead of
the break, and we're off again.

Speaker 2 (54:01):
But this roller coaster is around and upward level. It's
not been on the level.

Speaker 3 (54:07):
Each peak has been higher than the preceding peak. Each
trough has been higher than the preceding trough. In nineteen
sixty one, the lowest rate of inflation at that time
was one percent. In nineteen sixty seven, the next trough,
the lowest rate of inflation was two and a half
percent in nineteen seventy one, before mister Nixon introduced price

(54:32):
controls in order to control what was then supposed to
be the horrendous rate of inflation of four and a
half percent in that period. The lowest rate was about
four percent in nineteen seventy six. Last year, when again
we went through a recession to stop the inflation, the
lowest rate was six percent, was five percent.

Speaker 2 (54:55):
I'm sorry.

Speaker 3 (54:56):
So each bottom rate has been highed in the preceding one. Similarly,
each top rate has been higher than the preceding. In
nineteen sixty six, we reached four percent. In nineteen sixty nine,
we reach six percent, in nineteen seventy four, we reached
twelve percent in nineteen seventy nine. We will reach you

(55:18):
fill in the numbers. It's not a pleasant prospect. So
we've been on a roller coaster going up and up
and up, and we've been on that roller coaster because
of the problem that I've mentioned that we get accustomed
to our to our addiction, and we need bigger doses

(55:38):
to get another high. If we look at the period
most if we look at the most recent period, we've
had the same situation again. From January nineteen seventy four
to January nineteen seventy five. The quantity of money defined

(55:59):
to include the currency in your pockets and all deposits
at commercial bank demanded time. What has come, in the
jargon of the literature to be known as M two.
I apologize for having given it that unlovely name, But
M two has been grew in that year at six

(56:21):
point eight percent a year. That was a relatively low rate,
and it was that that was responsible for the tapering
off of inflation, so that by the end of seventy
six it was down to about a five percent.

Speaker 2 (56:34):
On a year to year basis.

Speaker 3 (56:36):
But in the period from January seventy five to now,
the money supply has been running at the annual rate
of ten percent a year. M two this quantity of money,
and that portends an increase in the inflation rate. We
are now we've hit the bottom and we're now on
the way up. We had a temporary bulge in January

(56:59):
February as a result of a very hard winner. But
the more fundamental phenomenon is that we're now on an upgrade.

Speaker 2 (57:06):
We'll probably hit.

Speaker 3 (57:07):
Seven to nine percent next year, something like that, and
the base rate of inflation today is somewhere in that level.
The tragedy of this whole history is that we have
time and again four times now paid the price of
stopping an inflation and not gotten the benefit. We've stepped

(57:31):
on the brakes. We've slowed down the monetary expension, we've
taken a recession, we've had unemployment, and then, just as
inflation is starting to taper off, we throw the whole
ball game away by going to the races again with
the printing press. Unfortunately, given these mistakes, at the present time,

(57:58):
the options open to this country are only bad options.
We don't have good options. If you were sitting in
at the Federal Reserve Board and deciding on monetary policy,
you mustn't suppose you'd have anything good you could do.

Speaker 2 (58:10):
Whatever you do is bad.

Speaker 3 (58:13):
Given the amount that you have now of money that
has now been pumped into the economy.

Speaker 2 (58:20):
You have only two bad choices.

Speaker 3 (58:22):
If you slow down drastically in order to try to
hold back inflation, the economy will experience a recession in
late seventy eight early seventy nine, and it may be
a fairly severe recess. Alternatively, you can say, well, we
can't do that, We've got to step on the gas.

Speaker 2 (58:41):
Keep doing what we're doing now.

Speaker 3 (58:44):
Then you are condemning the economy to going into another
period of double digit inflation.

Speaker 2 (58:50):
Two years ago, there was a choice.

Speaker 3 (58:53):
Having paid the price for slowing down the inflation, we
should have continued on a relatively slow rate of monetary
growth and then we would by now be well on
the way to cure for our inflation.

Speaker 2 (59:06):
But we have not done so.

Speaker 3 (59:09):
And as I say, I don't really blame the people
who are doing it. The real blame has to be
put on us, the America, the citizens, the voters of
this country, for not telling our government what we want
them to do. And I am afraid that we shall
have to go through several more of these swings in

(59:29):
the roller coasters before the American people decide that they
have had enough of it and that it's time to
bring it to an end, that it's time to send
an unmistakable message to Washington. We want you to stop
the roller coaster. When we do, there is no technical
difficulty about stopping it. Let me emphasize, it will not

(59:55):
be costless to stop it, but it will not be costless.

Speaker 2 (59:59):
To continue what we're doing.

Speaker 3 (01:00:01):
If I may conclude with a medical with my medical analogy.

Speaker 2 (01:00:05):
If you are sick, it's very, very seldom that.

Speaker 3 (01:00:08):
A doctor can give you a cure which will enable
you to rise from your bed the next man, the
next day, a whole person, completely unaffected by your illness.
We have a disease called inflation. Fortunately, our basic constitution
is strong. This is a strong, healthy country, although we've

(01:00:28):
been doing our best to make it unhealthy. We've been
doing our best to take measures that will reduce our productivity.
But nonetheless we're still a pretty strong, healthy country. There's
nothing basically wrong with us. But we have been suffering
from a self imposed disease of inflation. Sooner or later,

(01:00:48):
I am sure we will get up the will to
cure it. But we shall not cure it or continue
it without paying a price either way.

Speaker 2 (01:00:58):
Thank you, Thanks doctor Friedman.

Speaker 4 (01:01:21):
If you were advising President Carter with you advise him
to work through the Federal Reserve or.

Speaker 2 (01:01:26):
Through Congress to implement your recommendation.

Speaker 3 (01:01:30):
Well, I'm not sure those are different, and I'm not
sure it's really President Carter to work through them. You know,
the president has a lot of influence but very little power.
The President does not pass the appropriation bills. The President
has no direct control over the Federal Reserve, printing press.
The real source of power in this respect are the

(01:01:53):
Congress and the Federal Reserve together and jointly. And I
believe that's where the public at large has to bring
political pressure to bear to produce the right kind of policy.

Speaker 5 (01:02:07):
So we need to change Congress to get off the treadmill.

Speaker 2 (01:02:09):
No, we don't need to change Congress. Excuse me.

Speaker 3 (01:02:13):
You know, people have a great misunderstanding about this. People
in Congress are in a business. They're trying to buy votes.
They're in the business of competing with one another to
get elected. The same congressman will vote for a different
thing if he thinks that's politically profitable. You don't have

(01:02:33):
to change Congress. People have a great misconception in this way.
They think the way you solve things is by electing
the right people. It's nice to elect the right people.
But that isn't the way you solve things. The way
you solve things is by making it politically profitable for
the wrong people to do the right things.

Speaker 6 (01:03:00):
He said, rather optimistically. I think that you have detected
a trend wherein the public will accept a slowing down
of the rolling of the printing presses. I confess that
that trend is invisible to me, and I wondered what
evidence of it you have seen.

Speaker 3 (01:03:16):
I was really not referring directly to a trend to
slow the printing presses, but a more fundamental trend in
people's ideas and attitudes toward the role of government. Ten
years ago, twenty years ago, it was widely taken for
granted that there was hardly any problem the solution of

(01:03:37):
which did not reside in Washington, did not reside in
throwing more money at the problem. Very few people believe
that anymore. Today, people are greatly disillusioned about what government
can accomplish in the more particular area you're describing. Worldwide,
and not merely in this country, the public at large

(01:03:58):
has shifted its major emphasis from unemployment to inflation. It
is not any longer politically popular to reduce unemployment by
creating inflation. If you take a case like Great Britain,
which is in some ways been on the forefront of this.
Ten twenty years ago, it would have been said that

(01:04:19):
it was absolutely politically intolerable to have had rates of
unemployment of the kind that Britain is in. But today
the Labor government in Britain finds it popular, politically popular,
politically profitable to put its emphasis on reducing the rate
of inflation.

Speaker 2 (01:04:36):
In Britain.

Speaker 3 (01:04:37):
Last September at the Labor Party Conference, Prime Minister Callahan
found it politically profitable to say, we used to think
that if you had unemployment in a recession, the way
to get out of it was by spending more money
or cutting taxes. But if that was once a solution,
it is no longer an option open to us. I'm
not quoting precisely, but the sense of it, he said,

(01:05:00):
because we have learned that that only works temporarily, but
the ultimate result is more inflation. So you have, in
Britain and in other countries around the world, a willingness
on the part of the population at large two to
stand for measures directed at reducing inflation. The same thing

(01:05:21):
is true in this country every public opinion poll has
shown that inflation is a problem that the public at
large is more concerned about than the problem of unemployment.

Speaker 2 (01:05:32):
It will not be you see.

Speaker 3 (01:05:33):
I think President Carter faces a real dilemma at the
moment with respect to his own election prospects in nineteen eighty.
He cannot control I said before, he has much influence
but little power. He cannot really control it. But suppose
he could, what should he do. He's facing a dilemma.
Ten years ago, the eye answer would have been obvious.

(01:05:55):
Step on the gas print money create a great period
of prosperity by nineteen eighty. But with double digit inflation,
the double digit inflation will do them more political harm.

Speaker 2 (01:06:07):
Then the boom will do them good. So I think
there is.

Speaker 3 (01:06:10):
A very strongly detectable change in the attitude of the
public at large. On the one hand, they are more
inclined to attribute the inflation, the responsibility for inflation to government,
to be more conscious of it. And then the other
they have less rosy views about the power of government

(01:06:31):
to cure all ills. Thank you very much, Let's have
some more people come up here to increase our inventory
in process.

Speaker 7 (01:06:45):
Professor Friedman for the federal government's ability and willingness to
produce unlimited amounts of money. What are the implications for
the concept of a vital local and state government and
the broader question implication for the concept of federalism.

Speaker 3 (01:07:02):
Well, obviously, one of the trends that has been reducing
the viability of local and state government has been a
trend towards centralization, a trend toward enhancing the power in
the strength of Washington at the expense of the state
and a city hall. And no doubt the fact that
Washington present possesses a printing press and the city Hall

(01:07:24):
and the State House do not has been a factor
that has been contributing to them.

Speaker 2 (01:07:29):
But again we.

Speaker 3 (01:07:30):
Come back to the same question that has come up before.
Will that continue? Is that necessary? Is it inevitable that
the federal government will grow in power?

Speaker 2 (01:07:41):
If it is. If it does, then I agree with you.
Then we're headed.

Speaker 3 (01:07:46):
We would be headed toward a unified, centralized country. I
think one of our great straints is a country is
precisely the federal system. Precisely that we have a distribution
of power. That we do have states which attract which
attached loyalties to themselves, which have independent power. So I
think there is a trend in your direction, but I

(01:08:08):
don't think it necessarily needs to continue or necessarily will
continue a number.

Speaker 7 (01:08:14):
Of a government agency. Do we do ourselves a disservice
by quickly pursuing federal grants and funding to meet our
needs when often those grants are not our priorities, but
just where we can get matching money.

Speaker 2 (01:08:29):
Well, you have a dilemma there, given the program.

Speaker 3 (01:08:34):
Given that there is a federal program, I can't blame
you for trying to go get it. And yet I
think it sooner or later to the public will wake
up to the idea that they really aren't doing themselves
any favor by sending a dollar to Washington and getting
eighty cents back. That's been the experience what we have had.

(01:08:55):
It's a great defect of the centralation, and it's very
hard to understand why people allow themselves to be fooled.
But somehow they have the impression that if the money
comes from Washington, somebody else is going to pay for it.
But of course it's a two way trip, and there
is a discount taken off in Washington as it turns around.

Speaker 7 (01:09:19):
I don't know if I can ask one more question.
But since I deal with high school students and I'm
concerned about economical education in our schools, what is your
barometer as you talk to young people? What is their
projection of the business economy? I deal with many people,
young people who go into government thinking that that's where
the jobs are, and that concerns me.

Speaker 2 (01:09:42):
What is your fortune?

Speaker 3 (01:09:44):
Again, that is not preordained. We're masters of our own destiny.
That depends what we as a people decide. If we
as a people decide we want to continue on the
path we've been going on, which I hope we won't.

Speaker 2 (01:09:58):
But if we do, why then your youngsters are better
off going into Washington. They will get better salaries. Do
you know?

Speaker 3 (01:10:06):
Do you people know what the highest income average income
county in the United States is. It's not It's not
San Diego County. It's not even Marin County. It's not Westchester,
it's not any of those fancy Connecticut counties. It's Fairfax
County in Virginia, the bedroom of the Washington civil servants.

(01:10:28):
That's the highest average income county in the country. So
that you would be telling the students right if you
said to them, if you want to make an.

Speaker 2 (01:10:36):
Income go to work for Washington.

Speaker 3 (01:10:38):
But it's up to us as citizens to make that
no longer true. Thank you, yes, sir, yes ma'am.

Speaker 8 (01:10:49):
Recently we've heard that the inflation currently experienced in this
country won't respond to monetary restraint because it's cost push
inflation and not demand pull. What response would you have
to that analysis, if.

Speaker 3 (01:11:04):
Anny, it's another example of the people who produce the
inflation finding this trying to find scapegoats for their own deficiencies.
Of course, the inflation will respond to monetary restraint. There
is no such thing as cost push inflation, except in
the form of the delayed effect of monetary inflation. If

(01:11:27):
you have a monetary inflation that starts to push up prices,
it tends to hit retail and wholesale prices first, the
prices you and I pay. It's only later that it
works its way through costs. But then costs fall behind
prices and there's a makeup period, and during that period
you have what looks like cost push inflation. But there

(01:11:48):
has never been an inflation in history that didn't respond
to monetary restraint. If you look at American experience and restraint,
pond of the monetary restraint. If you take that roller
coaster I was telling you, on each occasion the slowdown
and the rate of inflation was preceded by a slower
rate of monetary growth. And you have much more dramatic
examples of that. Most dramatic example from American history of

(01:12:14):
how inflation responds to monetary restraint was one that was
once dug up by a student of mine when he
was writing a dissertation on inflation in the Confederacy during
the Civil War and in the later parts of that war.
You know, the South financed the war almost entirely by
printing press money, and the rate of inflation during the

(01:12:34):
Civil War in the South, I don't know, got up
to something like four or five percent.

Speaker 2 (01:12:38):
A month or more.

Speaker 3 (01:12:41):
But at one point in the later part of the war,
the Northern Army overran the place in the South where
they were printing money, and for two weeks the printing
presses couldn't operate, and lo and behold, within two weeks
the inflation stopped. And you've got many, many examples like that,
so that what you can say to people is they're

(01:13:02):
kidding themselves.

Speaker 9 (01:13:03):
Yes, sir, I've been I've been rereading James Buchana on
the monetization of the debt and his conclusion that we
can't possibly reduce the debt because of the depression effects
that would result. In other words, we're stuck with it forever.
What's your opinions on that?

Speaker 2 (01:13:23):
Well, which debt are you speaking of now? Are you
speaking of the funded debt? The bonds, the funded debts,
the fund of debt.

Speaker 3 (01:13:29):
We've been reducing it every year. It's much smaller now
in real turn, divided by prices or divided by income,
than it was right after World War Two? And how
have we been reducing the debt by monetizing it, by
paying it off through inflation. Now, when you come to
the unfunded debt, this three trillion or more of obligations

(01:13:53):
under Social Security and other programs, that's a much more
difficult task.

Speaker 2 (01:13:57):
I think I may say, if.

Speaker 3 (01:13:58):
You'll pardon me for a digression here for a moment,
that those fiscal conservatives who keep their eye on balancing
the budget and on the dinner making a great mistake,
and in fact that they have been the handmaidens of
the big spenders. What has happened over and over again
is that the big spenders get off and start spending money.

(01:14:21):
This produces the deficits. The fiscal conservatives crotch their heads
and say, my god, we gotta do something about that deficit.
So they go to work and raise the taxes to
pay for the deficit. And as soon as they get
the budget balanced again, the big spenders are off for
the next lap, and the so called fiscal conservatives that
turned out to do the dirty work for.

Speaker 2 (01:14:41):
The big spenders.

Speaker 3 (01:14:43):
As I said before, keep your eye on one thing,
and one thing only, how much government is spending, because
that's the true tax. Every budget is balanced. There is
no such thing as an unbalanced federal budget. You're paying
for it if you're not paying for it through it
in the form of explicit taxes. You're paying for it indirectly,

(01:15:04):
in the form of inflation or in the form of borrowing.
The thing you should keep your eye on is what
government spends, and the real problem is to hold down
government spending as a fraction of our end.

Speaker 2 (01:15:17):
And if you do that, you can stop worrying about
the debt.

Speaker 10 (01:15:20):
I have but two very different questions. But first, I
wonder if you'd comment on an assertion with regard to
your theory on the political process. It seems to me
that the incumbents who disagree with you and with me
are one step ahead of us, and they're so carefully
insulating themselves in the political process by giving themselves vast
purposes and benefits of incumbency. So we have people voting

(01:15:42):
for their re election not on the basis of their
policies or their issue positions of their votes, but whether
or not they're being serviced in their district, which is
a vastly different situation than was years ago.

Speaker 2 (01:15:53):
Well, that may well be true.

Speaker 3 (01:15:54):
I do believe that I agree with you that incumbency
is an enormous advantage of the days, that the drive,
of course for governmental financing of elections is really a
drive to strengthen the power of incumbents and make it
more difficult for anybody to challenge them. That the election,

(01:16:14):
what was the bill that was passed about campaign financing
limiting private funds was also a major step toward increasing
the advantages of incumbents. But I nonetheless believe that if
the public at large feels strongly enough about a subject,
Congress will listen and act in accordance with it.

Speaker 10 (01:16:35):
And aren't some of the same people feel strongly about this,
the same people who are so skinnical, cynical and skeptical
the political process, therefore taking themselves out of the voting process.

Speaker 2 (01:16:46):
I'm not sure whom you're referring to it this day,
the people who don't vote.

Speaker 10 (01:16:49):
Well, I'm talking about we see more and more people
becoming disenchanted, who believe strongly in the free market, who
are just giving up no matter who I vote for,
the policies continue, and as they take themselves out of
the political profits, were left with a proportionally large.

Speaker 3 (01:17:02):
Well, but there's more than one way to make themselves effective.
I understand your point, and I would say that the
most encouraging move I've seen around is one which started
in the state, and that is a move to take
the total budget out of the hands of the elected
representatives and determine it through a constitutional amendment. That was

(01:17:24):
a proposition one fight that was started to hear five
years ago.

Speaker 2 (01:17:29):
Unfortunately was defeated.

Speaker 3 (01:17:32):
Yeah, but I am very much encouraged by the strength
which the movement for such amendments around the country and
at the federal level is the strength which it is gaining.
As you know, last year Michigan had a similar proposition
in its belt and it was defeated too. It's very

(01:17:55):
interesting to compare the propaganda that was put out in
California and Michigan five years apart on the same proposition.
It was the same propaganda, financed and fostered by the
same groups, primarily the State Education Association, making the same
kind of misstatements.

Speaker 2 (01:18:13):
About the.

Speaker 3 (01:18:16):
About the proposition, and in both cases with considerable success.
But in both those states and in a considerable number
of others, there is a grassroots movement that is growing
and that I think we are going to see in
the next four or five years at least a half
a dozen states adopt tax limitation or spending limitation amendments

(01:18:38):
of that kind. In addition, on the federal level, the
Southern Governor's Conference a few years ago had a task
force which drew up a federal amendment to limit federal spending.
That task force was headed headed by Governor James Edwards
of South Carolina. Unless I am mistaken that the Southern
Governor's Conference has endorsed that propa, there are various Congressmen

(01:19:05):
and senators who have introduced similar budget by similar budget
limitation amendments in Congress. So I think that there is
a strong chance that we have a movement underway will
and which will give people something to vote for that
they think will be effective over and beyond voting for
particular individuals.

Speaker 11 (01:19:25):
Doctor Friedman, part of the twofold cure, you suggested tonight
would be a reduction of government spending. What areas of
government spending would you suggest are most amenable to reduction?

Speaker 2 (01:19:35):
Every area?

Speaker 3 (01:19:38):
I think that the only way to reduce government spending
is across the board, cut every single appropriation first year
by ten percent, the next year by twenty percent, and
just keep going.

Speaker 2 (01:19:50):
You know, why do you want to choose?

Speaker 11 (01:19:53):
The reason I asked that is it seems to me
that if higher unemployment is a short term side effect
of your inflation cure, then welfare costs are going to
go up as a result.

Speaker 2 (01:20:02):
Well, that depends on you.

Speaker 3 (01:20:03):
See, the problem you're raising is a following money. Every
one of us would like to reform a program, But
if you try to achieve a reduction in spending via reform,
you won't get it. But if you first achieve a
reduction in spending through across the board cuts, that will
force you to engage in the kind of reform you're

(01:20:24):
talking about, and I quite agree with you.

Speaker 2 (01:20:28):
I don't think we need to spend more money on welfare,
not at all.

Speaker 3 (01:20:31):
But if we had a more sensible welfare system, we
would spend less and yet give help where it's really needed.
You know, the welfare system today does not help the
people who really need it. If you take the total
amount of money which the government is now spending on
programs labeled as poverty programs to help the poort and
calculate how much that amounts to each person who is

(01:20:53):
designated as poor, it turns out that if they were getting.

Speaker 2 (01:20:56):
It, they would be among the rich people in this country.
But of course they aren't getting it. It's going to
lots of other people.

Speaker 3 (01:21:05):
So I agree with you that a temporary increase in unemployment,
as in the process of curing inflation, might very well
cause an increase in some kinds of expenditures on the
welfare side, but I think that that is not inconsistent
with cutting expenditures in general.

Speaker 11 (01:21:25):
Also, what is your opinion of consumer protection legislation as
it affects economic freedom.

Speaker 3 (01:21:30):
Well, most consumer protection legislation is not consumer protection legislation.
It's the enacting into the laws of the prejudices of
a small group of people who have organized themselves into
an effective lobbying group. Is the consumer really being protected
by having somebody else decide for him whether he may

(01:21:50):
use sacrine or not. He's not being protected, He's being hurt.

Speaker 2 (01:21:55):
You know.

Speaker 3 (01:21:56):
The most anti consumer measures on the books that have
been taken in recent months have been the imposition of
quotas or their equivalent voluntary restraints on the imports of
TV from Japan and of shoes from I think it

(01:22:17):
was Taiwan. Did you hear any of these consumer protection
agencies get up and protest about that? Where were they
when we really needed them? I think that there's the
most effective protection the consumer can get his free competition.
If you really want to have a pro consumer protection move,

(01:22:37):
then you ought to join yourself with other people in
promoting free trade.

Speaker 4 (01:22:49):
I have two questions. The first is how detrimental do
you believe the significant increase in petroleum products has been
to the rates of inflation throughout the world?

Speaker 2 (01:22:58):
Not at all?

Speaker 3 (01:22:59):
The increase when the petroleum products has been a negligible
cause of higher rates of inflation. It's been an excuse
for governments that have produced the inflation. After all, if
petroleum prices are a cause of the basic cause of inflation,
how can you explain the very different impacts on different countries.
Here are Japan and Germany. They both import almost all

(01:23:21):
their aisle. It should hit them alike. Germany went through
with a maximum rate of inflation around six percent. Japan
got up to thirty percent. What happened is that the
not the increase in petroleum prices, but the OPEC cartel
and the reduction and availability of petroleum has made has
has produced a transfer of wealth from the rest of

(01:23:42):
the world to the Arab countries. It's made us poor
to a very small extent insofar as it's made us poor.
It's had a slight effect on making prices higher, but
it has had a very trivial effect on the rates
of inflation.

Speaker 4 (01:23:56):
Second question is what do you believe the probability might
be of the removal of the capital gains tax as
well as the removal of the double taxation on dividends.

Speaker 3 (01:24:06):
Well, I think there is a possibility that you will
move in both those directions, but I think it's very
dubious that you will go all the way in either.

Speaker 2 (01:24:14):
Case, thank you.

Speaker 3 (01:24:17):
I may say, I think the more important point about
capital gains is not so much about whether it's removed,
but about whether the base for calculating capital gains is indexed.

Speaker 2 (01:24:29):
That's the really important question.

Speaker 3 (01:24:31):
It would be well worth paying the price of getting
rid of the special treatment of capital gains if you
could get the base of capital gains index because the
problem with capital gains taxation now is you're not taxing
real capital gains. You're taxing purely paper gains, which simply
reflect inflation. That's part of the whole problem of tax indexation.

Speaker 5 (01:24:56):
Doctor Friedman, one more question about tax reform.

Speaker 3 (01:24:59):
And one more question is right, because they're coming to
the end of our time, We've got one more gentleman there,
and we'll try to handle both of these.

Speaker 5 (01:25:05):
Yes, Congressman Kemp of New York has a proposal for
a permanent tax cut. I don't know how much, partially
an emulation of President Kennedy in nineteen sixty three. I believe,
the idea being that if you cut taxes in times
of a slow down, you'll pick up the economy and
perhaps even produce more revenue for the government. Now, given

(01:25:26):
your skepticism about tax reform, is this perhaps one proposal
you might endorse.

Speaker 3 (01:25:32):
Well, I have long ago concluded that I am in
favor of reducing taxes at any time, under any circumstances,
for any excuse, that that's the only effective way to
exert pressure on government spending. Congress will spend whatever the
tax system will yield, plus a good deal more. But

(01:25:53):
that plus a good deal more is not infinitely elastic.
There is some pressure on them when it gets lord,
and therefore, the only effective way, in my opinion, other
than these kinds of constitutional amendments I was talking about before,
of bringing down spending is to reduce taxes. So as
I say, I don't go along with mister Kemp's reasons,
but I'm in favor of cutting taxes.

Speaker 9 (01:26:16):
Yes, sir, I am associated with the banking system, and
I do.

Speaker 2 (01:26:20):
I won't hold that against you.

Speaker 9 (01:26:21):
I do have a line of credit, and I this
relates to m too. I could go in tomorrow and
sign a piece of paper. The bank will write out
a deposit ticket. Thereby the money supply has increased. How
do you stop that?

Speaker 2 (01:26:35):
Oh?

Speaker 3 (01:26:35):
No, the bank will only be able to do that
if you can find the reserves, and for the banking
system as a whole, one bank can always get reserves
from another bank. But the great mistake that everybody makes
about many different items, it's not only this, is to
confuse what's true for the individual.

Speaker 2 (01:26:53):
With what's true for the society as a whole.

Speaker 3 (01:26:55):
The most fascinating thing about economics the reason you know,
in a way, it's always an interesting thing about economics.
It's the most trivial subject in the world, and yet
so many people misunderstanding. It's so hard for people to
understand it. Why I believe a major reason is because
almost every interesting economic proposition has the following characteristic. What's

(01:27:18):
true for the individual is the opposite of what's true
for everybody together. It looks to you as if you
can decide how many pieces of paper you carry in
your pocket, how much cash you have. It looks to
you as if you can decide how much deposits you have.
It's true you can, but to everybody together, it's a
game of musical chairs. The Federal Reserve determines a total

(01:27:40):
quantity of money, and then it's shared out among the people.
Your bank can increase its deposits by attracting reserves away
from another bank, but that puts pressure on another bank
to contract the total amount of reserves will set a
limit to them.

Speaker 2 (01:27:55):
Let me give you some other examples.

Speaker 3 (01:27:57):
It looks to you, it looks to the It looks
to you when you go to the store and you
see an object offered for sale, as if the price
is fixed and the amount available to you for you
to buy is indefinite. If you want to buy two
pairs of shoes at that price, you can buy two pairs,
three pairs. You can buy three pairs to the whole

(01:28:18):
country together. There are certain number of pairs of shoes
available at the moment, and the price is what's free
to move up or down to equate the number of
pairs of shoes people want to buy to the pair available.
You try this out, and almost every proposition what's true
for the country as a whole is the opposite of
what's true for the individual. And that's equally true with

(01:28:39):
the proposition you're presenting.

Speaker 9 (01:28:42):
Depends on who gets there.

Speaker 3 (01:28:44):
Yes, it does, it does very much, So thank you.

Speaker 1 (01:28:50):
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(01:29:11):
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(01:29:35):
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