Milton Friedman on Money / Monetary Policy (Federal Reserve) Part 1

it's seldom that you can date precisely when there's a major change in a human institution that law in a monetary institution but you know it's an interesting fact that I heard you even date precisely a really drastic change in the character of the monetary system around the world and you can date it on August 15 1971 that's the date on which Richard Nixon finally ended the supposed agreement by the US government to sell gold for $35 an ounce to foreign governments and that was the final nail in the coffin of the kind of monetary system that had prevailed from the beginning of time so far as you can see that is all all monetary systems before that were commodity systems based on a commodity whether it was silver or gold or other things from August 15th 1971 no national currency in the world is any longer based on on a commodity you know when people talk about money they think it means something but what in the world is the money that people use today but even then they they the money that we used was not in any meaningful way connects with the goal and it was just paper as it is today it was a long time you know literal commodities were used as money for centuries for millennia when you go back whether you go back to Greece or Rome they use silver coins or gold coins earlier than that the first recorded kind of money was a mixture of gold and and silver it wasn't a deliberate mixture it was a mixture that came out of the earth in the form of what was it they called it the earliest it was a king somewhere in Arabia who discovered this amalgam and that's what they used his money he was the first one who will put a stamp on it and said this is money this is to be taken as having a certain value and as late as the 19th century I guess most monetary transactions were actually made with coins what about 1850s the most actual transactions were either written with checks like they are today or with bills that but they had banks but at least if you're using bills to act as if it was a commodity because it was this underlying relationship between the piece of paper and some number of ounces of gold someplace or some number of weight of commodity someplace hey what's happened then is since 1971 is we've had a pure fiat standard where it's just the whim of a government as to what our money is going to be worth we were pretty close to that even before so that well and dollar you know it used to be if you took out a dollar bill it we used to say on that dollar bill the United States of government promises to pay one dollar it used to say now it doesn't say that after that for a long time oh it's not so long you're young my life dollars not so long I think I was only I'm going to changed what I was a kid when it changed I'm not sure you were I think it only changed in about 1960 or when they go off silver certificates I think so I think when was the next day finally ended for a long time the government had a policy of a fixed price for silver and they didn't go off that until something like the nineteen fifties or sixties a purchasing program but now it just says the United States of America one dollar now what really gives it some meaning and said this note is legal tender for all debts public and private right now what does that mean well that's the way the government defines what the you know it is that means that when I have a debt with someone I could present that bill and if they don't receive it well they've not they fail to fulfill their poor no but that's only true if the debt is in isn't that right sure it's the only thing it's really good for is government payment well no wait wait wait no see if a contract is written in dollars well the question of the court has to decide what is the word dollar mean okay and then at the article 1 of the Constitution gives Congress the power to decide what the word dollar means it's just like article 1 also says the Congress has to decide how long the art is or how big the gallon is and what I think the government does is it decides units of weight measure and value and the dollar is the unit value and it's given meaning to that by saying this piece of paper is what we mean by the dollar now what's amazing is that people accept that you know this meaning scrap of paper is is taken to have value one of the things I find the course of years of talking about money to lots of people hardest thing people have to Excel find it the thing they find it hard is to understand is it literally there are 19 people sitting around a table in Washington you'll have the power to have to twice as many dollars or half as many dollars or ten times as many dollars and the people you know people think that the number of dollars in existence is somehow determined by some physical or technical or some other rule the idea that there just is who are these 19 people seven governors of the Federal Reserve System plus twelve presidents of Federal Reserve banks not all of them have a vote only five of them have a vote but seven governors plus the five bank presidents can vote what to do about the amount of money and there's absolutely no other control except the indirect control that the Congress could pass a law changing their powers but the amazing thing about that group is that we regularly contemplate changing the unit of measure it's as if remember there's one other person that we never talk about which is the director of the National Bureau of Standards who determines how long the art is we never think about changing the length of the yard but regular the people you're talking about shrink the dollar gets smaller and a little bit smaller every year it's as if we had a shrinking yardstick we also it's amazingly not in terms of the definition it's still the legal tender but that purchasing power just back to the original point we also have an indirect way if our president causes our acts in such a way that we have higher rates of inflation we tend to vote them out which is probably the leading reason Jimmy Carter was thrown out and also Labour government was and Margaret Thatcher came in so there is some kind of a very tenuous check on their acting I think it's back to me whether one of the interesting things is not only does the u.s. have this system but Japan German him many other countries have a system and it delivers really a remarkably stable currency in spite of the fact that they all the elements of instability of the hair and yet the performance of the system especially in the last ten years the United States for example has really not been banned yes by the interesting thing is you see that until 9:00 until August 15th 1971 there was at least the pretense that it was not being determined by 12 people right that it was really being determined somehow or other by the link which it had to go as you go way back it was a you correctly called it a preteen oh it was a pretence it wasn't a pretense to begin with if you go back far enough if you go back to what happened when gold was discovered in California in 1848 it was very far from a pretense that the quantity of money was being determined by how much gold there were well it's not the quantity doesn't matter it's the value of the money the value of the money declined when gold became more plentiful it became more it declined because there was more of it the quantity the value of the money is not unrelated to the quantity of money just just argue in favor a little bit of this this Fiat standard one of the things that's that's good about it is society is not really forced to go and take gold out of the ground and and/or silver out of the ground and put it someplace in order to create a money money system so if the government's doing its job correctly that is having a non inflationary growth rate of the money supply then we could have this fiat money this pieces of paper instead of the gigantic expenditure of resources on necessary to pull gold out of the ground being our money stock as and save a lot of resources that we could use elsewhere that's an argument I often made used to make and I'm not so confident about anymore I used to say it's just simply absurd weight as it rolled out of the ground in South Africa in order to bury it under the ground in New York and the vaults of the Federal Reserve but since I've observed the operation of this fiat money standard it is in costless either it is in costless because it introduces so much uncertainty into the world about what's going to happen you're right the point is in the best of all worlds the savings of resources if governments do the correct thing from from the beginning it would be the best of but what's the more world's one of you know known governments to behave as if it's the best of all worlds I've looked at way shorter life time and they always do things wrong and but the US government's in the last 10 years has delivered a more stable purchasing power of money than we had into the gold standard now I admit that's only 89 degrees I'm one day before the last team I can not another ten year periods in which I was true yeah okay I'm just saying it's not it's not impossible you can take a ten-year period for example I don't think from 1896 to brillier seventeen year period from about not 1898 let's say to 1914 in which you had a very regular up thing but it was very stable and with stable stable inflation yeah that period was very similar to what we've had in the last 10 years in tag a period from about 1920 to 229 when it was very stable horizontally seven years right some governments do a good job however with their monetary policy and I think something that's interesting is why is the United States which is where we invented monetarism where you invented monetarism why have we done such a bad job and why have the Japanese done such a good job and why of the British not even admitted that monetarism is a sensible view but hold on firm would have the jet you take the Japanese again you're very time bound until 1973 they did a very lousy job until 1973 they were up and down all the time that's right there was more price instability in Japan yeah well since Greenspan has taken over the Fed and my business which is money management field we've talked about the Japanese ation of u.s. monetary policy where you have the sensation that Alan Greenspan is actually trying to follow the monetary policy that the Japanese have filed in their good period and he's trying to reverse the monetary policy that the United States followed before he came into office but if you take the period take Japan go back okay 73 they had a reveler they change because inflation and zoomed up to 25% there is a feeling something had to be done about it and they did from then on have a very good monetary policy until about 1988 then they went off again when the USD government and it was our fault the US government Jim Baker and and his gang went to the Louvre record and said Japan you got to help us do your thing so we want the end to go to to to beat Val you know nothing about the dollar once a dollar too strong the dollars to strengthen so they'll help us do that and they have since by what happening both right applause you know the Nova agreements I wanted to support the dog support the dollar they wanted okay it's a positive Louisville natural 86 that's what caused the Japanese to print so much money they went from 8.8 to higher rates of growth rates in their m2 plus CDs which is what they tend to look at but now Japanese growth rates of money are down to about two percent and this is part of the problem that's that's causing Japan now in Japan is their economy right now remarkable well similarly if you take Germany Germany has done a relatively good job right now well it's interesting one of the interesting phenomenon to me is how long people's memory is there's no doubt the reason Germany had done such a good job is in considerable part because from 1918 to 1920 to 23 24 they suffered a tremendous inflation tacular inflation you know people don't realize what hyperinflation is people in the United States complain about prices rising but in in Germany at that time they paid wages three times a day after breakfast lunch and dinner so people could go out and spend the money before it lost its value it was a good idea to buy two beers at once because the price of the second beer went up faster than the beer was laughs pictures in my textbook where people would walk around with wheelbarrows of money to make their pays well that's a very extreme that's John Maynard Keynes made that crack once he said when he was in Russia during this period and he saw a man rushing with a wheelbarrow money he said for the first time he knew what velocity of circulation really but what one of the interesting things right now going on is just watching some of the things that happen in Russia where I was recently there and experienced forty percent fifty percent a month inflation and this is two people who give them price stability in their mind for years and years and years and you go from fixed prices where everything was fixed by the government to this crazy system where prices are moving at 50 percent of months it's left them breathless their dumb found that they just don't even know what how to make any sense out of it and it's interesting watching these poor countries of Eastern Europe and and the ex-soviet Union undergo these these dramatic changes right now once again it's because their money doesn't mean anything there it's these pieces of paper well if you come back to the United States for a moment and come back to general attitudes about money I suppose one of the real difficulties about people understanding money is distinguishing going back to something you were saying about distinguishing between the number of pieces of paper the number of units right and what that number of units will buy what what economists call the nominal amount of money versus the real amount of money and to an ordinary person it seems kind of curious let's suppose these 20 19 people sitting around the table suddenly decided that the quantity of money should be increased and everybody got more money somehow let's not ask about the process each individual separately would think he was better off and yet the economy of the home might be very much worse off and that's why I think when you ask the question why is it the countries have inflation's do something that almost everybody agrees after the event was a bad thing I don't believe there's anybody in Argentina who thinks it was a good thing that they had inflation rates of 100 200 percent a year I don't think there's any but there are very few people in the United States who think it was a good thing that during an 1970s inflation was allowed to go up until in 1980 it was in the neighborhood of 20% and yet we do it and that's really a puzzle isn't it why is it but it speaks the more general problem of the failure of government governments fail very characteristically in the same direction they promise too much they generate too little revenue and it often you know the hyperinflations we talked about it are generally related to that phenomenon of the government printing money in desperation to try to honor its spending it's also in the case of the u.s. in the 70s it was probably I think you've even mentioned this it's the first round they didn't know how strong this tiger was that they'd had had unleashed when they got rid of gold back in the early 70s and that was the first round now politicians now know that if you let inflation go up to 20% the United States your party's out of power for 15 years yeah I think that's right and this is now the case that the those 19 people might say well I'm given to the pressure but the person who's the president says well if you give in to the pressure we're out of power for 20 years and he's going to be very upset about that is he is he I have just been observing that over the last year mr. Bush has been trying to urge the Federal Reserve to go more and more to print more money to use conditions because he could was the rate of inflation is declined during that period rate of inflation he was declined but the president's been saying let's keep inflation that high percent level where it was before and now it's dropped to three per I agree that was the wrong thing from the do I also agree that the political calculus that he went through in order to allow for an increase in marginal tax rates was an incorrect when I don't understand what he gained by doing that either so if you're saying we have an irrational person who's not maximizing his political support well I'll have to I'll examine with that but suppose we were thinking of the public at large here now of everybody in the United States money is you're right that it's a special example of a more general problem government failing to achieve what it seeks to do but it's a particularly important problem nothing else which if it goes wrong does so much harm and the interesting thing is that I seldom have seen any structural suggestions suggestions for really changing the system in a way which would make money a better servant and a less cruel master well you and I both put we bought oh there's nothing into that lots of act we'd have been unsuccessful do you think because yes I have been unsuccessful absolutely we haven't been able to persuade the public at large we haven't persuaded been able to persuade the powers and be well in some sense it hasn't been that bad yeah I think that's right it's not it's not like our school systems or something like that but it is it it inflation is not at the top felissa so it just does every moment not only any no no by the time you bring it down to three or four percent a year which it is now and of course it's not too easy to measure what is three or four percent a year in what some prices are going up some we're going down medical care as a computer user yes I know that there's been big deflation absolutely lots of things automobiles one of the bills are more expensive in dollars but they're much cheaper in terms of the number of months you have to work to get one they ever work right and moreover the quality of them has improved enormously so it isn't all one way and yet it seems to me that for not only in the United States but elsewhere it's fascinating that there's been so little attention to money and what he can do and how much harm it can do when it goes wrong and we have the thing we haven't done is built in any protection against repetition of the disasters of the 1970s or even worse which could happen I mean the federal government is drifting in the direction of a true fiscal emergency sometime in the next five 10 15 years and that could be accompanied by the kind of a severe inflation emergency event we've not had for a long time so I think it's you know the time to act would be now in terms of of course October forms no part of the public at large is concerned inflation - that means higher prices and to them they look at higher prices as being set by business enterprises and the most popular explanations of inflation are not those we've been talking about saying the most

Channel: BasicEconomics

Views: 47,124

Rating: 4.9412627 out of 5

Keywords: liberty, Milton Friedman, Economy, Economic, Freedom, Economics (Field Of Study), Inflation, Money, Taxes, Tax, Policy, Free, Trade, Free Trade, Consumer Protection, ralph nader, Gas, Oil, Energy, Environment, Free Society, Justice, Enlightened, Iceland, Debate, Finland, Estonia, Chile, Federal Reserve, Monetary policy, fiat, money, sound, Gold, Standard

Id: 4F2aIDxadIk

Length: 20min 1sec (1201 seconds)

Published: Tue May 22 2012

Reddit Comments

[u/forgoodnessshakes]

That was recorded before the real abuse of the money supply even got started.

[u/jam-hay]

Part 2... https://youtu.be/V2FBgy45ksw

[u/[deleted]]

Its even more scary how spot on THIS video from the 90's is https://youtu.be/onn34J74dnU?t=9

[u/Bitcoin_to_da_Moon]

he already wears an apple watch (nice video)

[u/cryptonaut414]

Funny how at 8:40 guy on the left mentions the same negative impact of gold mining, waste of energy and resources, which are spouted by people today about bitcoin mining.

[u/[deleted]]

Amazing find thanks for part two. EVERYONE NEEDS TO WATCH THIS NOW!!

[u/emobe_]

ear rape at 11:49

[u/gitzofoxo]

and people wonder how we got here, and why BTC isn't going anywhere but up and over

[u/ebaley]

Even if the gold standard were still being used the fact that it could be stopped at any time is a reason to worry. Bitcoin has a perpetual "gold standard".