Jennifer Burns: observation

Transcript context

…… metaphor, “otherwise it’s going to explode.” Nixon just files the memo away. Nixon loved people to think he was influenced by and following the wisdom of Milton Friedman, but he didn’t actually want to do that. He just wanted the political benefit that came from it. So then comes the moment where the US Treasury Department realizes we are going to run out of gold. What should we do? And everybody decamps to Camp David, and Nixon decides, we’re just going to stop redeeming currency for gold. It’s called slamming the gold window shut. Done. And he also, at that same meeting, decides to institute price controls. He does a whole bunch of stuff. It’s an emergency. He calls it the New Economic Plan, which is an unconscious echo of the Soviet New Economic Plan, so a problematic name, a problematic policy. And Friedman is livid at the price controls, but he’s like, “Actually, it’s great that you close the gold window. Let’s go all the way to floating exchange rates.” And this idea was heresy within the Treasury Department. Everyone’s very committed to the idea of the gold standard convertibility possibility of the United States at the court, the financial system kind of hem and haw. But at this point, Friedman has a very close relationship with George Shultz, and George Shultz is a high-level appointee who will eventually, over the course of the Nixon administration, become the Treasury Secretary. And so Friedman is feeding Shultz all his ideas about how we should move to floating exchange rates, how we shouldn’t try to reconstruct Bretton Woods and the people in Treasury… It’s funny because I read some of their accounts, and actually Paul Volcker is in the Treasury Department at this time, and he can sense that Friedman is in here somewhere, feeding his boss ideas. He doesn’t quite know. And in the oral history, Shultz talks about this quite a bit, so at any rate, Friedman exerts this behind-the-scenes influence, and what Shultz does is just lets Bretton Woods fade away. He doesn’t make grand pronouncements. It just slowly the world shifts to a regime of… For a while, it was a regime of steady prices, and then they call it a steady regime of changing prices, or whatever. The language changes, the reality changes, and they end up where they are, so that’s a real measure of Friedman’s influence. If there had been another economist in Shultz’s ear that said, “No, catastrophe is imminent. We have to go back to Bretton Woods,” he probably would’ve worked harder. The US government would’ve worked harder. And so that becomes one of these pieces of globalization. And what people don’t realize is there used to be, in addition to these floating set capital ratios, you couldn’t bring capital in and out of different countries. You had to register. You couldn’t invest. Where all these rules and strictures and the falling of Bretton Woods really blows that all open. It’s a precursor to globalization, so Friedman is right there. u had to register. You couldn’t invest. Where all these rules and strictures and the falling of Bretton Woods really blows that all open. It’s a precursor to globalization, so Friedman is right there. Now, he’s very ambivalent about Nixon. He sees that Nixon is not an honest person. He thinks he’s very intelligent, and Nixon’s dream is to create a new centrist majority. So, he does many things to go back on his supposed economic principles and ideals. So Friedman does not like this. He doesn’t like the price controls. He’s in communication with his old mentor, Arthur Burns, who’s now the Chair of the Federal Reserve. And Burns is basically doing everything wrong in monetary policy. And I describe this in the book in some detail, these anguished letters back and forth, and basically, as I see it, Burns doesn’t have a solid theory of inflation, and the more Friedman pushes him, it’s almost like Burns is willfully ignoring Friedman and doing the opposite of what Friedman says, so Burns is running a very loose monetary policy. Inflation is quite considerable over the ’70s. We were all spooked by… What did it get to? 6%, something like that. Recently for a very short time, this is inflation going over 10%, hovering at 8% for basically the whole decade of the ’70s, going up and down but with extremely elevated rates. And so, the Carter presidency largely follows foreign policies. A big part of… The Carter presidency largely falls. Foreign policy is a big part of it, but the failure to tame inflation is part of it. And then Reagan comes in, and now Reagan loves Friedman and Friedman loves Reagan, very mutual feeling. The Reagan administration creates an advisory economic board. Friedman’s on it. He’s retired now. He’s entering golden years, but he really has Reagan’s ear. And here what he does is he convinces Reagan of his theory of inflation, which is inflation has been caused. It’s a monetary phenomenon that has been caused by bad monetary policy. Inflation has an accelerating dynamic. The only way to end inflation is by really showing and signaling that government policy has changed. And when you do that, it’s very painful for a short amount of time, people will suffer, but then you will come out on the other side into stable prices, and this is what you need for economic prosperity. when you do that, it’s very painful for a short amount of time, people will suffer, but then you will come out on the other side into stable prices, and this is what you need for economic prosperity. So the man who implements this policy, Paul Volcker, he’s definitely influenced by Friedman, buys the big picture of Friedman. He even buys Friedman’s specific technique of the monetary growth rule and of the focus on monetary aggregates, which Friedman has said, “Money matters, aggregates matter, and that’s what money is.” Pretty quickly Volcker finds that because of inflation and the financial deregulation in response to it, the aggregates don’t work the way Friedman said they would. And so the specific policy Friedman recommends, Volcker tries it for a year or so, doesn’t work super well. But what does work is letting interest rates go high, go above inflation, to a point where both the general citizenry and the financial markets believe like, oh, they’re actually serious about inflation. And because we’ve had a decade of inflation with all these presidents saying, Ford, “We’re going to whip inflation now,” that monetary policy has lost credibility. This is why people focus so much on credibility today, because once it’s lost, it’s really hard to get it back. And one way Volcker gets it back is interest rates over 20%. Unemployment very high, as high as 25% in construction sectors. And as this is happening, Milton Friedman is whispering in Reagan’s ear, “This is the right thing. Stay the course. This is going to work.” Now, interestingly, he hates Volcker or Volcker hates him, and Friedman will never give Volcker credit for this policy, but he will give Reagan credit for this policy. But he owes credit himself for keeping Reagan from wobbling on this policy and just pushing it through. And he also tells Reagan, very pragmatically, “You better do this now. You’ve got a four-year term. Do this in the first two years of your term. Things will have turned around by 1984 when you run for reelection and you’ll benefit from it.” And that’s absolutely what happens.…

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