Milton Friedman - Money and Inflation (FULL LECTURE)

is my great pleasure to introduce to you Milton Friedman thank you the topic I'm going to talk about tonight I had thought it was announced if not it will 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 is uninterested in at least the inflation half of it most of you are also very interested in the money half but from a different point of view whenever I talk about inflation I am reminded of a wonderful story about the man who decided 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 and he got himself put into the deep freeze for a 20-year period and of course before he went into the deep freeze he left all his securities and his worldly belongings at his broker's with instructions to do the best he could for him and 20 years later after the deep freeze it worked he was unthawed and came out of the deep freeze and of course the first thing he did was to run to the telephone to call his broker and his broker said to him well you know you're a millionaire many times over oh really said the man what happened to this talk and the broker said it went from here to here you know multiplied many in 10 times 20 times what happened to this stock he kept on going but suddenly the telephone operator interrupted the man was just ecstatic telephone operator interrupted and said sorry your three minutes are up that'll be two hundred and fifty thousand dollars for the next three minutes please that's real inflation that's a that's at the moment a story but it's not a story which does not have some examples in history inflation is a disease it's a dangerous disease for a society it is sometimes a fatal disease for a society it's a disease that if allowed to rage unchecked can destroy a society and we have many such examples 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 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 unchecked can do you have the great example in many examples in South America Brazil before 1964 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 mr. Elena yen day in power 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 nation to pay attention to this disease 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 and what will happen if we don't cure it 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 now the first step to our understanding the cause of inflation is to recognize that it is always an 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 than an output moreover in the modern era the important next step is to recognize that today government's control the quantity of money so that as a result inflation in the United States is made in Washington and nowhere else of course no government any more than any one of us likes to take responsibility for bad things we're 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 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 sheiks who are producing it now of course businessmen are greedy 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 the WA 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 if you listen to the people from the Communist world they'll tell you kavik inflation is a capitalist phenomenon that's not true if you look at Europe today 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 Switzerland has low inflation the United Kingdom in recent years has had inflation rates running up to 20 25 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 in saying the capitalist 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 ultimate cause you 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 a hundred years for Great Britain for two years for Sweden for 200 years there is never in history been an inflation that was not a come accompanied by an extremely rapid increase in the quantity of money there is never in history but an extremely rapid increase in the quantity of money without an inflation but in order to persuade 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 a first of those slides now maybe you can make out that there are two lines on that chart that chart is for the United States and it covers the 13 years from 1964 to through 1976 and one of those charts the solid line is a 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 1970 because that's the way they're constructed both of those series were expressed on 1970 as a base of 100 in order 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 six months before the price index so that you are not there's nothing funny about that and you can see that the two lines are almost indistinguishable now I've got a segment of 13 years up there but if I had a segment of a hundred years the relationship would be the same way throughout the whole of that period but you may say 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 now the interesting thing here is that you can see that the quantity of money for a while and the later SiC later say in the 70 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 immediate sense determines the price index but it doesn't operate instantaneously sometimes there are delays of a year or two but sooner or later they all come back together well the United States and Germany are very similar countries what about another country let's have the third chart and the third chart there it's supposed to be for Japan I can't read it is that what it says up there that's for Japan and you will notice that the Japan experienced a much greater price rise and 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 30 percent a year to where today 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 you can see each one of these has a little bit more inflation 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 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 as inflation well if that explains this relationship for Britain what explains the previous chart for Japan where trade unions are not very important or much weaker than they are in Great Britain or what explains the next chart which is a honey for Brazil that's we can we have the next the last chart now that's a little that's an inflation that's really an inflation that's none of these baby inflation's we've been playing with of course there are still better ones in Argentina and Chile but we don't have a big enough room now here 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 by trade unions but 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 the one hand and prices on the other that evidence is available for hundreds of years in many countries and there are no exceptions but not only gets you the first base the question is why is it that the quantity of money increases relative to output if you go back a hundred years ago and then here in California this is very appropriate to go back a little more than a hundred years ago sometimes the quantity of money increased more rapidly than output because of discoveries of gold or precious metals as you know you had the gold rush in California in 1818 40s early 1850s you had the Australian gold discoveries and the same period in 1850s and you had a worldwide inflation as a result in the 1890s to 1913 you had a worldwide inflation because of the defection 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 but those were the good old days before the days when governments discovered that it could escape from that 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 do not have inflation x' for those reasons today you have inflation because governments create a very large quantity of money the question is why do governments do that and today 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 say the government does is that's wrong the government doesn't do it you do it I do it we the citizen do it we tell the people in Washington we tell our congressmen and our senators and our representatives we want you to spend more money on us but we don't want you to put any taxes on it so no we don't want you to levy taxes we want you to 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 hundred if the federal government Bend's 450 billion dollars and only raises 400 billion dollars in taxes who do you suppose the pedal pays out other fifty billion dollars do you suppose the Tooth Fairy does you pay it and I pay it 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 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 he doesn't have to vote for it have you ever known of a congressman who got up and said I vote to impose a tax in the form of inflation of 10% next year no sirree inflation is a tax which is imposed without representation and which nobody has to vote for and of course it's a marvelous tax from the point of view of congressmen trying to meet the demands of his constituents for more spending inflation is its taxation yields tax revenue in three different ways it yields it directly we think of these pieces of paper we carry in our pocket as 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 $100 directly in taxes the government sends you back a receipt you paid as a hundred dollars in taxes well now the beauty of printing money is that the receipt is right straight with the payment of taxes what you're getting there or not is not money tax receipts and from the point of view of the government those pieces of paper and I'm exaggerating of course are not really pieces of paper that's only the primitive way of doing it in our modern age we do it in a more sophisticated way through using a bookkeeper spin 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 counter run as fast as they can to another part of the bank to pay it out over another counter in the form of loans it's not deposited there 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 so when the 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 but it also gets revenue in two other ways in the first place with a 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 you're pushed up into higher brackets of the income tax and on the average if your income if prices go up ten percent and your income goes up 10 percent your taxes will go up 15 percent so that the Congress again is in a marvelous position it can vote to lower tax rates when in fact taxes are going up there's a lot of talk in the papers these days is in the news these days about the president proposing a tax cut next year that's pure fiction nobody is proposing a tax cut these much-publicised tax cuts of the past few years have not been tact cuts at all inflation is 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 result of the automatic effects of inflation in the third place the government gets revenue from inflation by repudiating its debt many people keep worrying about the government debt that's not something you should worry about because the government debt today is smaller the effect that is the announced government debt the open and aboveboard government debt bonds outstanding and the like is smaller as a percentage of the national income than it was 20 30 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 securities in the past ten years has paid the government for the privilege of lending to it they 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 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 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 he did it in a different way he did it by taking nice good full-bodied silver coins and replacing the silver by a an alloy 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 become in diocletian's era little more than a copper coin with a wash of silver now I happen 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 so that's been always throughout history a major reason why you have had creation of money to finance government expenditures but we've added another 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 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 got to do something about this 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 unemployment but only temporarily only so long as you could fool the people and then when people got on to what was going on it came out in the form of inflation in the United States we've also had before 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 professor seekin referred to the mistake of the Federal Reserve Bank in the nineteen late 20s early 30s from 1929 to 1933 the quantity of money in the United States went down by a third and that was a major factor that produced the catastrophe that was a great mistake of the Federal Reserve it learned from that mistake government agencies like people don't always make the same mistake 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 their mistake 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 real function was to control the quantity of money now most of you will will be inclined to say well that's all very well but aren't there some important things you've left out 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 Britain's inflation higher wages are in the main a consequence of inflation and not a cause of it and as I say the 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 cite one is to say what about international influences the government 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 inflated now that was a valid explanation before 1971 when 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 Flinn the United States had produced inflation in many countries around the world because their currency Zarek's were linked through a fixed exchange rate with ours 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 and the proof of that is very simple if inflation is a worldwide phenomenon if it's an asset 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 two 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 have inflation in many countries but if it were an international phenomenon how come it's roughly zero to one percent in Switzerland four to five or six percent in Germany ten percent in France 18 percent in Great Britain maybe higher than that in in Italy and so on down the line no 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 did what was it that I connected with prices 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 a real source of inflation is that our productivity has not been increasing as much as it should or to say that the real cure for inflation is to increase productivity now productivity is an enormous ly 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 3 percent instead of 2 percent 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 and 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 this country from 3% a year to 4% a year that would be a 33 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 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 the hero or the villain as you wish 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 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 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 witch's 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 to do to be cured is to stop smoking but I cannot in any way bring him to stop smoking he refuses to do it 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 come first and the bad effects only come the next morning when you have a hangover now that's exactly the way it is with inflation when you start inflating the good effects come first after all the government's printing money everybody thinks he's richer he's got all these pieces of paper and initially it does have that effect it makes business good it expands output it's only after a while when it's works at what 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 that the bad effects come first and the good effects come later when you try to cure it if a man who has been subject to it a craving for alcohol goes off to wig and it's terrible he's got a terrible time getting rid of his craving but if he once can succeed in doing so everything will be fine it's exactly the same thing with inflation if you first slave you succeed in slowing down inflation you will initially have some very difficult times 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 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 oh no you say I haven't gained and yet the fact is that a great many people gain from inflation there are many many people who have benefited 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 30 years has gained from inflation he was able to borrow on a 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 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 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 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 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 they are side effects of a cure if you have your appendix out if you go to a doctor and say I have a pain 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 them well you know I think I'll just stay in bed and not have the operation that isn't going to cure you and in the same way unemployment is not a cure for inflation I can tell you a hundred ways to create unemployment that will produce more inflation not less 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 simultaneously in fact we've coined some ugly new words like stagflation and slum flashin to try to explain this phenomenon or I shouldn't say to explain it to name it so unemployment is not a cure for inflation but it is an almost inevitable side effect of an effective cure now why should that be 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 the answer is fundamentally because of the time delays between the turning of the printing press and the ultimate effects on output and on prices both ways you produce the same result look on the upgrade suppose the government first prints money and spends it to pay for its expenses to begin with the people who find themselves doing better business don't know what's don't know what the explanation is government is paying more money its employees have better salaries or coming to the store and buying more goods the storekeeper is delighted to sell them the same prices as before each man thinks this is something special happening to him the shoe manufacturer says ah look I can sell more shoes the demand for shoes is going up he doesn't recognize that what's really happening is that demand is going up everywhere and then not only is the demand for shoes going up but he's going to have to pay more to get labor he's going to have to get pay more to get leather he's going to have to pay more to produce his product but when that shows up when after a while he finds out that his costs 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 bank accounts then it takes them a little while to realize that and they start spending it and then it's another 12 to 18 months before that works through into prices so on the average over the past hundred years there's and in the Britain it's been for two hundred years I say a 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 oven on the other but the same thing happens the other way if the government slows down its spending in the first instance people simply experiencing 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 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 unemployment on the average suppose a country gets accustomed to 10% of inflation that's perfectly level but let's something people can get along with what will happen everybody will know that it's going on old wages will automatically tend to go up by 10 percent more a year than they otherwise would all prices will tend to go up by 10 percent more instead of interest rates being 5% they will be 15% 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 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 it's only the surprise if you get adjusted to it it doesn't do any good it's just like again alcoholism and drug addiction when a fellow first get started on drinking all it takes is one drink to make them happy but after his body gets adjusted to that it takes a little more in pretty soon he's taking a half a bottle similarly with drugs it takes bigger 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 there's no way to avoid the 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 7% it would be a mistake to try to bring that down to zero next year we ought to do it over three or four year period to give people a chance to adjust 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 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 Conn did 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 I have a I would go the other way I would like to see the taxes indexed and with respect to the salaries of congressmen of government officials I would index them perversely every 5% 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 don't cure inflation we have no good choices if we don't cure inflation if we continue at high rates of inflation we'll 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 did that in this country in 1971 with disastrous results wage and price controls are not a cure for inflation in fact wage and price controls you will find are impo by governments that want to inflate but want to conceal it from the populace governments want to get 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 what happened in nineteen after 1971 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 1950s in the 1950s we started to have we first had a very substantial inflation during the Korean War and then after that was over we had a creeping inflation we it was an accident that that 1950s inflation didn't continue and grow from that point on but we had a political accident 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 mr. Eisenhower was willing to take the unpopular measures that's that brother stopped inflation that put us back on a non inflationary source by approving measures that led to the route to a series of recessions in 1958 and then in 1960 by holding down government spending holding down government money creation so that from an inflation rate which at that time was regarded as terrible a three three and a half percent it was brought back to essentially zero our real inflation started in the nineteen 1960s when John F Kennedy I inherited this windfall of a non inflationary environment as a result of President Eisenhower's policies and from 1960 on we have been on a roller coaster we have been going up in inflation we've 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 that tends to produce a downturn but the moment unemployment 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 brake and we're off again but this roller coaster is around an upward level it's not been on the level each peak has been higher than the preceding peak each trough has been higher than the preceding trough in 1961 the lowest rate of inflation at that time was 1% in 1967 the next trough the lowest rate of inflation was two and a half percent in 1971 before mr. Nixon introduced price 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 1976 last year when again we went through a recession to stop the inflation the lowest rate was 6% it was 5% I'm sorry so each bottom rate has been higher than the preceding one similarly each top rate has been higher than the preceding in 1966 we reached four percent in 1969 we reached six percent in 1974 we reached 12 percent in 1979 we will reach you 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 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 1974 to January 1975 the quantity of money defined to include the currency in your pockets and all deposits at commercial bank demand in time what has come in the jargon of the literature to be to be known as m2 I apologize for having given at that unlovely name but m2 has been grew grew in that year at 6.8% 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 76 it was down to about a 5% on a year-to-year basis but in the period from January 75 to now the money supply has been running at the annual rate of 10% a year M 2 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 February as a result of the very hard winter but the more fundamental phenomenon is that we're now on an upgrade we'll probably hit 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 stepped on the brakes we slowed down the monetary expansion 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 a printing press unfortunately given these mistakes at the present time the options open to this country are only bad options we don't have good options if you are sitting in at the Federal Reserve Board and deciding on monetary policy you mustn't suppose you'd have anything good you could do whatever you do is bad given the amount that you have now of money you have no that has now been pumped into the economy you have only two bad choices if you slow down drastically in order to try to hold back inflation the economy will experience a recession in late 78 early 79 and it may be a fairly severe recession alternatively you can say well we can't do that we've got to step on the gas keep doing what we're doing now then you are condemning the economy to going into another period of double-digit inflation two years ago there was a choice 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 a cure for our inflation but we have not done so 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 Amerian of 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 the roller-coaster 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 be costless to stop it but it will not be costless to continue onward if I may conclude with a medical it with my medical analogy if you're sick it's very very seldom that a doctor can give you a cure which will enable you to rise from your bed the next man a hole 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 been doing our best to make an 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 I am sure we will get up the will to cure but we shall not cure it or continue it without paying a price either way thank

Channel: BasicEconomics

Views: 198,465

Keywords: liberty, Milton Friedman, Economy, Economic, Freedom, Economics (Field Of Study), Inflation, Money, Federal, Reserve

Id: THAaIZmxfNA

Length: 57min 44sec (3464 seconds)

Published: Fri Apr 27 2012

Reddit Comments

[u/dagoldenpan]

This guy make have been short but his brain was big