FRIEDMAN FRIDAY “How to Cure Inflation” in Milton Friedman’s FREE TO CHOOSE Part 4 of 7 “The job of the Federal Reserve is to control the money supply”
In 1980 I read the book FREE TO CHOOSE by Milton Friedman and it really enlightened me a tremendous amount. I suggest checking out these episodes and transcripts of Milton Friedman’s film series FREE TO CHOOSE: “The Failure of Socialism” and “What is wrong with our schools?” and “Created Equal” and From Cradle to Grave, and – Power of the Market.“If we could just stop the printing presses, we would stop inflation,” Milton Friedman says in “How to Cure Inflation” from the Free To Choose series. Now as then, there is only one cause of inflation, and that is when governments print too much money. Milton explains why it is that politicians like inflation, and why wage and price controls are not solutions to the problem.
In this episode Friedman noted, “The job of the Federal Reserve is not to run government spending; it’s not to run government taxation. The job of the Federal Reserve is to control the money supply and I believe, frankly, I have always believed as you know, that these are excuses and not reasons for the performance.”
DISCUSSION
Participants: Robert McKenzie, Moderator; Milton Friedman; Congressman Clarence J. Brown; William M. Martin, Chairman of Federal Reserve 1951_1970; Beryl W. Sprinkel, Executive Vice President, Harris Bank, Chicago; Otmar Emminger, President, Ieutsche Bundesbank, Frankfurt West Germany
MCKENZIE: And here at the Harper Library of the University of Chicago, our distinguished guests have their own ideas, too. So, lets join them now.
BROWN: If you could control the money supply, you can certainly cut back or control the rate of inflation. I’d have to say that that prescription is a little bit easier to write than it is to fill. I think there are some other ways to do it and I would relate the money supply __ I think inflation is a measure of the relationship between money and the goods and services that money is meant to cover. And so if you can stimulate the goods, the production of goods and services, it’s helpful. It’s a little tougher to control the money supply, although I think it can be done, than just saying that you should control it, because we’ve got the growth of credit cards, which is a form of money; created, in effect, by the free enterprise system. It isn’t all just printed in Washington, but that may sound too defensive. I think he was right in saying that the inflation is Washington based.
MCKENZIE: Mr. Martin, nobody has been in the firing line longer than you, 17 years head of the Fed. Could you briefly comment on that and we’ll go around the group.
MARTIN: I want to say 19 years.
(Laughter)
MARTIN: I wouldn’t be out here if it weren’t for Milton Friedman, today. He came down and gave us advice from time to time.
FRIEDMAN: You’ve never taken it.
(Laughter)
MCKENZIE: He’s going to do some interviewing later, I warn you.
MARTIN: And I’m rather glad we didn’t take it __
(Laughter)
MARTIN: __ all the time.
SPRINKEL: In your 19 years as Chairman of the Federal Reserve, Bill, the average growth in the money supply was 3.1 percent per year. The inflation rate was 2.2 percent. Since you left, the money supply has exactly doubled. The inflation rate is average over 7 percent, and, of course, in recent times the money supply has been growing in double-digit territory as has our inflation rate.
EMMINGER: May I, first of all, confirm two facts which have been so vividly brought out in the film of Professor Friedman; namely, that at the basis of the relatively good performance of Western Germany were really two events. One, the establishment of a new sound money which we try to preserve sound afterwards. And, secondly, the jump overnight into a free market economy without any controls over prices and wages. These are the two fundamental facts. We have tried to preserve monetary stability by just trying to follow this prescription of Professor Friedman; namely, monetary discipline. Keeping monetary growth relatively moderate. I must, however, warn you it’s not so easy as it looks. If you just say, governments have to have the courage to persist in that course.
FRIEDMAN: Nobody does disagree with the proposition that excessive growth in money supply is an essential element in the inflationary process and that the real problem is not what to do, but how to have the courage and the will to do it. And I want to go and start, if I may, on that subject; because I think that’s what we ought to explore. Why is it we haven’t had the courage and don’t, and under what circumstances will we? And I want to start with Bill Martin because his experience is a very interesting experience. His 19 years was divided into different periods. In the first period, that average that Beryl Sprinkel spoke about, averaged two very different periods. An early period of very slow growth and slow inflation; a later period of what at the time was regarded as creeping inflation __ now we’d be delighted to get back to it. People don’t remember that at the time that Mr. Nixon introduced price and wage controls in 1971 to control an outrageous inflation, the rate of inflation was four-and-a-half percent per year. Today we’d regard that as a major achievement; but the part of the period when you were Chairman, was a period when the inflation rate was starting to creep up and money growth rate was also creeping up. Now if I go from your period, you were eloquent in your statements to the public, to the press, to everyone, about the evils of inflation, and about the determination on the Federal Reserve not to be the architect of inflation. Your successor, Arthur Burns, was just as eloquent. Made exactly the same kinds of statements as effectively, and again over and over again said the Federal Reserve will not be the architect of inflation. His successor, Mr. G. William Miller, made the same speeches, and the same statements, and the same protestations. His successor, Paul Volcker, he is making the same statements. Now my question to you is: Why is it that there has been such a striking difference between the excellent pronouncements of all Chairmen of the Fed, therefore it’s not personal on you. You have a lot of company, unfortunately for the country. Why is it that there has been such a wide diversion between the excellent pronouncements on the one hand and what I regard as a very poor performance on the other?
MARTIN: Because monetary policy is not the only element. Fiscal policy is equally important.
FRIEDMAN: You’re shifting the buck to the Treasury.
MARTIN: Yes.
FRIEDMAN: To the Congress. We’ll get to Mr. Brown, don’t worry.
MARTIN: Yeah, that’s right.
(Laughter)
MARTIN: The relationship of fiscal policy to monetary policy is one of the important things.
MCKENZIE: Would you remind us, the general audience, when you say “fiscal policy”, what you mean in distinction to “monetary policy”?
MARTIN: Well, taxation.
MCKENZIE: Yeah.
MARTIN: The raising revenue.
FRIEDMAN: And spending.
MARTIN: And spending.
FRIEDMAN: And deficits.
MARTIN: And deficits, yes, exactly. And I think that you have to realize that when I’ve talked for a long time about the independence of the Federal Reserve. That’s independence within the government, not independence of the government. And I’ve worked consistently with the Treasury to try to see that the government is financed. Now this gets back to spending. The government says they’re gonna spend a certain amount, and then it turns out they don’t spend that amount. It doubles.
FRIEDMAN: The job of the Federal Reserve is not to run government spending; it’s not to run government taxation. The job of the Federal Reserve is to control the money supply and I believe, frankly, I have always believed as you know, that these are excuses and not reasons for the performance.
MARTIN: Well that’s where you and I differ, because I think we would be irresponsible if we didn’t take into account the needs and what the government is saying and doing. I think if we just went on our own, irresponsibly, I say it on this, because I was in the Treasury before I came to this __
FRIEDMAN: I know. I know.
MARTIN: __ go to the Fed; and I know the other side of the picture. I think we’d be rightly condemned by the American people and by the electorate.
FRIEDMAN: Every central bank in this world, including the German Central Bank, including the Federal Reserve System, has the technical capacity to make the money supply do over a period of two or three or four months, not daily, but over a period, has the technical capacity to control it.
(Several people talking at once.)
FRIEDMAN: I cannot explain the kind of excessive money creation that has occurred, in terms of the technical incapacity of the Federal Reserve System or of the German Central Bank, or of the Bank of England, or any other central bank in the world.
EMMINGER: I wouldn’t say technically we are incapable of doing that, although we have never succeeded in controlling the money supply month that way. But I would say we can, technically, control it half yearly, from one half-year period to the next and that would be sufficient __
FRIEDMAN: That would be sufficient.
EMMINGER: __ for controlling inflation. But however I __
VOICE OFF SCREEN: It doesn’t move.
FRIEDMAN: I’m an economic scientist, and I’m trying to observe phenomena, and I observe that every Federal Reserve Chairman says one thing and does another. I don’t mean he does, the system does.
MCKENZIE: Yeah. How different is your setup in Germany? You’ve heard this problem of governments getting committed to spending and the Fed having, one way or the other, to accommodate itself to it. Now what’s your position on this very interesting problem?
EMMINGER: We are very independent of the government, from the government, but, on the other hand, we are an advisor of the government. Also on the budget deficits and they would not easily go before Parliament with a deficit which much of it is openly criticized and disapproved by the same bank. Why because we have a tradition in our country that we can also publicly criticize the government on his account. And second, as if happened in our case too, the government goes beyond what is tolerable for the sake of moral equilibrium. We have let it come through in the capital markets. That is to say they have enough interest rates that has drawn public criticism and that has had some effect on their attitude.
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