Fiscal and Monetary Policy * by Milton Friedman Cemla Boletin Mensual 15, August 1969, pp Centre for Latin American Monetary Studies

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1 Fiscal and Monetary Policy * by Milton Friedman Cemla Boletin Mensual 15, August 1969, pp Centre for Latin American Monetary Studies I want to talk today mostly about the problems of the American economy. The major economic problems which the American economy is faced with right now are four in number. There is first the problem of slowing down inflation, the second that of avoiding unemployment, third, getting control of the government budget and fourth the balance of payments. I would like to say a few words about what the facts are on each of these problems, but then I shall spend most of my time on two of the problems I mentioned, namely, the problem of avoiding and controlling inflation and the problem of the balance of payments. Let me first, however, set the stage by making a few comments of what the factual situation is with respect to each of these problems. On the inflation front there are two things that it is important to recognize. The first is that taken as a whole the U.S.A. has an extraordinarily good record with respect to inflation. Over the post war period prices in the U.S.A. have risen by less than in almost any other country in the world and this record is not only for the post war period. If you take the nearly two centuries of American experience we have had major inflations only during wartimes. The price level in the U.S.A. before the outbreak of World War II in 1939 was roughly at the same level it had been over a century earlier. The present price level in the U.S.A. is higher than it was in the 1930 s primarily because of the inflation during World War II. So the record for the U.S.A. is one of extraordinary concern and sensitivity to the problem of inflation. At the moment, however, it is also true that we are having price rises which, though small by the standard of some countries, are large by American standards. Prices in general are rising at the rate of about 5% per year. One month s data multiplied by 12 gave a scare headline in yesterday s newspapers that the cost of living was rising by 9.6% a year. But that is taking one month. Taking the average of any period in the recent past prices are rising at about 5% a year. That is much too high for the U.S. although as I say it is relatively low for some countries. On the level of unemployment we have, by American statistics, a very low figure. I say American statistics, not American standards, because our numbers for unemployment tend to come out higher than some of the European numbers mostly because we collect our statistics differently and they have a different meaning. But our average unemployment level at the moment is about a little less than 3½%. But that overall figure, that figure of 3.3 or 3.4 is a misleading and meaningless figure. If we take married men who represent the bulk of the main labor force the rate of unemployment among that group is less than 1 ½%. What that means is that you have a very short period between jobs. The total number of people who have been unemployed for more than something like three months individually is very small, far smaller than the total recorded as unemployed. The figure of 3.3% is an average of the less than 1 ½% for the married men on the one hand and rates that go up as high as 25% for teenage negro male youth. The major problem of unemployment is concentrated in small fringe groups where there are special structural problems. In terms of the normal operation of our economy we have super full employment. 1

2 The third problem I mentioned was getting control of the government budget and here I am speaking about the federal budget, the budget coming from Washington. It is not often realized how rapidly that has increased. Federal government expenditures in the last six months of the Johnson administration were roughly equal to total expenditures in the last year of the Eisenhower administration. So in the course of eight years the federal budget roughly doubled and that understates the pressure on the budget because large programs were enacted which will involve spending in later years. The problem is that there is wide-spread agreement that we are not getting our money s worth for government spending and that we need to keep it under control. I may add that the increase in spending was primarily in the non-military field. There has been much talk about the growth of military expenditure. They did grow, they are large, but there was an even more rapid growth in non-military expenditures. The fourth of the major problems I referred to is the balance of payments. Here, as I will point out more carefully later on, the U.S. is at the moment in a very fine position. There is no balance of payments problem for the U.S. True, the balance is today a result of a worsening of the current account and an improvement of the capital account. But the strange thing about double entry bookkeeping is that if you have a balance of payments the one thing it does is to balance. You can have a capital inflow only by accommodating it on current account. As I will argue at greater length later, I believe there is no problem on the balance of payments, although I would also agree that if we did not get our inflation under control, while other countries did get their inflation under control, then, on those two grounds the future might raise problems that the present does not disclose. So much for a brief survey of these major areas. Let me talk now in more detail about the two problems I want to concentrate on. The problem of inflation and the problem of the balance of payments. In talking about inflation I shall put to one side for the moment the international complications. This would be impossible if I were talking about the problem of inflation for the Netherlands or for some other small country, but for the U.S.A., which has a very small foreign trade sector for which trade abroad amounts to about 5% of our total income, it is possible to speak as if we were a closed economy and to put to one side and come back longer to the problems of the linkage with other countries through fixed exchange rates. It is widely believed, almost an article of faith, that inflation is produced by government deficits. This is a belief which is one of those half-truths, the half which is false is at least as important as the half which is true. There are many examples of inflation without government deficits. There are many examples of government deficits without inflation. Let me cite an example of each from U.S. experience. In the U.S.A. after World War I prices rose by roughly ⅓ from 1919 to In that year the U.S. government was running a large surplus. You all know that in the U.S.A. prices fell drastically from 1929 to In most of those years the U.S. government was running a large deficit. The relation between deficits and inflation is not direct, but indirect. It depends on how deficits are financed. If deficits are financed by printing money, if they are financed by adding money to the quantity of money in the community, they will produce inflation. If they are financed by borrowing from the public they will not produce inflation. If they are accompanied by the withdrawal of money from circulation as in 1931, 1932 and 1933 they will be accompanied by deflation. As you know the French have a saying cherchez la femme. If you want to understand inflation, cherchez la monnaie, look for money, look for the quantity of money. Inflation is always and everywhere a result of a more rapid increase in the quantity of money than in output and whatever produces such a rapid increase in the quantity of money will produce inflation. Sometimes what produces a rapid 2

3 increase in the quantity of money may be discoveries of new gold. That is what produced inflation in the world in 1950 s. (It was Australian and California gold discoveries). Sometimes what produces an increase in the quantity of money is the financing of government deficits. That is what produced hyperinflation in Germany after World War I. It has produced inflation in many countries, but the crucial point is that anything will produce inflation if, and only if it produces a rapid increase in the quantity of money. This brings me to the issue that has been very much in the forefront of public discussion in the U.S.A. and in the rest of the world about inflation, namely the role of monetary policy on the one hand, and of fiscal policy on the other. It is important to distinguish between these two if we are to understand how economic policy will affect the course of prices. Ordinarily, of course, monetary policy and fiscal policy are both being conducted simultaneously and it is hard to distinguish which is doing what. But if one is to understand the process it is important to distinguish the separate effects of fiscal policy by itself and monetary policy by itself. When I speak of fiscal policy by itself what I mean is the relation between government taxes and government spending for a given quantity of money. If we speak of a tightening of fiscal policy we mean an increase in taxes or a reduction in expenditures. But if we are to understand the effect of such a change in fiscal policy we must ask what does the government do with the additional money it raises. And when I speak of fiscal policy by itself I mean that if the government imposes additional taxes, it either reduces the amount it borrows from the public or it pays back some debt, but does not use that revenue to reduce the quantity of money. On the other hand, when I speak of monetary policy I refer to the changes in the quantity of money by tighter monetary policy, I mean a slower rate of increase in the quantity of money. By looser monetary policy or easier monetary policy I refer to a more rapid growth in the quantity of money. Now I realize that these terms are often used in a different way. That very often tight money is taken to refer to high interest rates and easy money to low interest rates. I shall return to that point in a few minutes when I discuss the effects of monetary policy on interest rates. Let me return, however, to the role of fiscal policy in stemming inflation. Just as it is widely believed that deficits are the cause of inflation, it is also widely believed that higher taxes are deflationary, regardless of what monetary policy is associated with them. One of the extraordinary ironies of intellectual history is that the businessman, the politician, the financial journalist are all today becoming Keynesians just when the profession of economics is turning in the other direction. There is a cultural lag in these matters and it takes about 20 years for changes in the ideas of the profession of economics to be accepted by the public and even by the informed public. So everybody today thinks he knows, along with the early Keynesians, that taxes reduce aggregate demand regardless of what monetary policy is associated with them. In my opinion this is a mistake and yet it seems so self-evident on the surface that it is worth spending a few minutes explaining why tax increases are not necessarily deflationary and may be offset by other forces. The usual argument is very simple and it was widely used in the U.S.A. in 1968 before the increase in taxes in the middle of that year. It is widely used today in connection with President Nixon s request for a larger budget surplus. The argument goes if you raise taxes the taxpayer has less money to spend and if he has less money to spend does that not reduce the pressure on prices? Of course. So far so good. But that is only half the story. Let us suppose the government raises taxes as the U.S. government did in 1968 by ten billion dollars. We must ask what would it have done otherwise. The answer is it would have borrowed ten 3

4 billion dollars more. But then if the taxpayer has ten billion dollars less the purchaser of government bonds has ten billion dollars more. The one side of the account is that the government takes in more in taxes. The other side of the account is that it needs to borrow less to finance its expenditures. So on the one side the taxpayer has an incentive to lower this spending and on the other side the demand for loanable funds on the capital market is less. What will happen under those circumstances, if we assume that the monetary authorities are not changing their policy as a result of the tax increase, is that the smaller demands on the credit market will tend toward a lower interest rate and the lower interest rates will encourage other people to borrow the funds that the U.S. government would otherwise have borrowed. And so we saw in 1968 that the imposition of the surtax was accompanied temporarily by some reduction in interest rates. I do not mean to say that what I have just outlined is a complete analysis of the effect of taxes on inflation. What it says is that there is no first order effect of higher or lower taxes on inflation. There is a second order effect. If interest rates are lowered as a result of higher government taxes people may be induced to hold larger cash balances and that may be slightly deflationary, but both theory and empirical evidence suggest that if the quantity of money is not affected by government taxes then changes in the government budget have very small effect on the rate of inflation. We happen to have a beautiful example of this in the U.S.A. in You all know that the surtax was imposed in the middle of 1968 and all of those people who had been promoting the surtax and who had been urging that we needed a surtax said: Ah! This will slow down inflation. I may say parenthetically that I personally happened to be one of the very small number of American economists who was opposed to the surtax then and who is in favor of eliminating the surtax today, primarily because I believe that taxes in the U.S. are too high, not too low, and that the only way to get government spending down is to get taxes down. The U.S. government, like most other governments, will spend whatever the taxes will raise, plus a little more, and the only way I can see to get government spending down, is to get taxes down. But let me go back to the main story. With the exception of a few people like myself there was widespread belief that the 10 billion dollars surtax would dampen spending. What we said, those who shared my views, was whether it dampens spending or not depends on what the Federal Reserve does. If the Federal Reserve, we said, increases the quantity of money rapidly, that will have a greater effect than the tax increase. If the Federal Reserve slows down the rate of money creation then you will have a dampening of inflation. The Federal Reserve cooperated beautifully with the desire to have a scientific experiment. It proceeded in its usual infinite wisdom to increase the rate of growth of the money supply. So we had a clear case -- tax policy deflationary, monetary policy inflationary. You all know what the result was. The quantity of money grew in the last six months of 1968 at an extremely rapid rate. Depending on the particular definition of money you take it grew somewhere between 8 and 12% per year. The result was continued and accelerated inflation. Prices continued to rise, although there was some sign of a slowdown in the rate of increase of consumer spending because the tax increase hit mostly consumers. But, as we had predicted in advance, this was offset by an increase in investment spending, in residential and non-residential construction and in inventories as the federal government reduced its drain on the capital markets. What you had was a much smaller level of borrowing by the federal government and therefore a larger volume of funds available on the capital market to finance the other activities. I hasten to add that one swallow does not make a spring. This one example is an illustration and not a proof. If you had only the one example, you could not have great confidence in the conclusion that what happens to the quantity of money is far more critical for inflation and deflation than what happens to taxes and spending. 4

5 But we have a great deal of evidence. This is a subject on which by now there has been an enormous amount of empirical work done. The studies which various people have made of American monetary experience over a century, some recent empirical studies that have been made on post war U.S. experience, all agree that what happens to the quantity of money is far more critical for the course of nominal national income, for the course of spending in dollar terms, for the course of prices, than what happens to government taxes and spending. Now again, I do not want to overstate the case. There is a lot of leeway, a lot of flexibility in the relation between monetary change and income change. There is a tendency for the pendulum always to swing too far and I find myself these days in the unexpected position of warning people not to take the monetary relations too seriously. There is a connection but it is by no means a rigid mechanical link. But nonetheless it remains true that there is one and only one way in my opinion by which any country can effectively stem inflation and that is by slowing down the rate by which it increases the quantity of money. There are two reasons why there is considerable difficulty in accepting this conclusion. One of those reasons is the tendency of commercial bankers to look at the wrong thing. They tend to concentrate on the credit aspects of monetary policy, on borrowing and lending, on interest rates, and not on the quantitative effects on money. The banker tends to believe that money is tight when interest rates are high. He tends to believe that money is easy when interest rates are low and this leads him astray. Let me suggest to you that you look at the facts. If I ask the people in this room in what parts of the world are interest rates high, what would you say to me? All of you know that if you want to get interest rates of 20, 30, 40, 50% you will find them in places like Chile or Argentina or Brazil. Are those countries which you would describe as having tight money? On the contrary those are countries where the quantity of money has increased very rapidly, where prices have been rising rapidly, and the reason interest rates are high is because money has been easy. Or, I ask you gentlemen, in what parts of the world today are interest rates relatively low? You will tell me Germany, you will tell me Switzerland, and I will say to you I take it those are countries that have easy money policies. And you know quite the opposite. You know that those are countries which have held down the rate of growth of the money supply. So in this area the broad facts of experience are precisely the opposite of what most people take for granted. Most people take it for granted that if the quantity of money is increased rapidly that will lower interest rates. But as I say, the facts are that wherever the quantity of money has increased rapidly, interest rates have been high. Wherever the quantity of money has increased slowly interest rates have been low. So the relationship is precisely the reverse of the one people anticipate. Now, I should explain that the situation is a little bit more complicated than I have described because what happens is that the short term influence of the quantity of money on interest rates is in one direction and the longer term influence is in the other. But by now experience and preaching have combined to produce some change in attitudes in this respect. In his testimony before the joint economic committee about a month or so ago Chairman William McChesney Martin, for the first time in my recollection, described the monetary policy of the Federal Reserve system in terms of what was happening to the quantity of money. This was a major revolution. Central bankers almost always talk about monetary policy in terms of whether credit is tight or easy, in terms of interest rates, in terms of availability of credit. But I am delighted to report that on this occasion Mr. Martin pointed to what was happening to the quantity of money. He went on to say that of course he did not mean to suggest that changes in the quantity of money were necessarily the most important thing, but he said this influence should not be underestimated. This is extremely important from the point of view of judging 5

6 future policy in the U.S.A., because I have found over the years that if you can tell me what the Federal Reserve is going to do I will be able to tell you something about what the economy is going to do, but that I have had a much harder time predicting what the Federal Reserve is going to do than what the consequences of their action would be. But I believe that it may be easier right now to predict because so long as the Federal Reserve was looking primarily at interest rates you could not be sure whether what they saw corresponded with what they were in fact doing. But if, as I think, it is more nearly the case now, they are starting to look at the quantity of money much more carefully. Then if they announce that they plan to be tight you might be able to put some confidence in it. I said before that there are two main reasons why it has been difficult to understand and to accept the relation I mentioned between the quantity of money and income. One reason I mentioned, was because of the tendency to concentrate on interest rates rather than on the quantity of money. A second reason is because of the delays, the lags in the effect of monetary changes on the economy. Here again we have by now accumulated an enormous amount of experience. If today you slow down the rate of growth of the quantity of money, if today you shift, as the Federal Reserve did in December of 1968 from a rate of increase in the quantity of money of between 8% and 12% to a rate of increase of about 2% per year, for a time there will be almost no effect because it takes a considerable period of time for this change to have its impact on the economy as a whole. Our studies show that it takes anywhere between 6 months and a year or a year and a half for these monetary changes to show up in the economy, and that is partly why it has been so very difficult for people to recognize the relationship between changes in the quantity of money and changes in national income. Because if you look at them simultaneously the relationship is very loose. You must look as what is happening today to the quantity of money, and what will be happening to income 6 or 9 or 12 months from now. I think that is extremely important if you are to understand the present situation in the U.S.A. Prices in the U.S.A. today are still rising rapidly and have shown no sign of slowdown. Why? Because they are still reflecting the rapid rate of monetary increase in Money was rising then, as I have mentioned, at a rate of something like 8 to 12%. That is still working itself through the system. You are still having the effects of that rapid increase. We had a change in monetary policy around December of 1968 or January of 1969 and that has started to have its influence on the capital market. It has not yet had a substantial influence on the economy. You gentlemen are all associated with the capital markets and it is important to recognize that monetary change affects the capital markets much more rapidly than it affects the economy as a whole. And you can understand why that should be so. The capital markets are in existing assets. They are very quick to adjust. They can adjust instantaneously. Prices can rise or fall overnight. The economy is a question of spending, of a faster or a slower rate of production of goods and takes time to produce a change. The measure people take today may not affect spending for 5 or 6 or 7 or 8 months from now. In the USA today it is proposed to suspend the investment tax credit. Everybody recognizes that that will not affect spending on investment until perhaps So you have the very general phenomena that forces that affect income take much longer to make themselves felt than the forces that affect the capital market. That is why the immediate impact, the short-run impact of a slower rate of monetary growth is on the capital market. 6

7 The effect in December and January of shifting to a 2% rate of increase in the quantity of money was in the first instance to reinforce the rise in interest rates. To begin with the initial effect was to raise interest rates, the initial effect was to make the stock market rather dull. But that s the first effect. As the slower rate of monetary growth starts to affect spending and income it will produce a decline in the demand for loanable funds because as income slows down the desire to invest will slow down, the desire to borrow will slow down and so subsequently you will see that interest rates will stop rising and will start to taper off. And so far as the economy is concerned you will see that there will be a slowing down in the rate of income growth. Now, how far this will go, when it will happen, depends partly on what the Federal Reserve System does from now on. You now have a period of about three months of rather slow monetary growth. If tomorrow the Federal Reserve were to turn around and to start increasing the quantity of money rapidly, that three months of slow growth would only make a mild ripple in the course of economic expansion. On the other hand if the Fed continues the policy of slow monetary growth then there is every reason to expect that that will produce a slowdown in the economy sometime after the middle of the year. Here again I may say there is an interesting controlled experiment. At the end of 1968 there were two classes of forecasts about The great majority of the economic analysts said the first half of 1969 would be slow and the second half would see an upturn. Why did they say that? Because they were still counting on the surtax to exert its influence. On the other hand, the minority, those like myself, who stress monetary forces said there is one thing you can be sure of: the first half of 69 would be very strong I say strong, that shows the kind of foolish language we use because what we mean is that the first half will continue to be inflationary. Rapid increases in nominal income are a bad thing at the present time, not a good thing, if you agree that you want to keep inflation under control. What we said was that if anything, you will have a rapid rate of growth of nominal income in the first half and a slowdown in the second. Well, so far, half of that prediction has been reasonably confirmed. The rate of increase of income in the first half has been rapid, but our necks are still on the chopping block with respect to the second half. If the current rate of monetary growth continues there is every reason to expect a slowdown in the rate of income growth in the second half. To begin with that will have little effect on prices. Prices have an inertia of their own and they tend to continue for a while but if the degree of monetary tightness is maintained then I think the inflation will also tend to slow down perhaps a bit later, perhaps by the fourth quarter of this year, or the first quarter of next year. Indeed, by my standards, the present degree of monetary tightness is too great. If I were calling the shots I would not be as tight as the Federal Reserve Board has been because I think that when you have been inflating at the rate we have been inflating it is well to taper off gradually. You run the danger if you step on the brakes too hard of throwing the economy into a more serious slowdown than is desirable. This is a very hard course of action to follow because here we are, say the Board, for three months we have been maintaining relatively tight money and there is no sign of any effect on the economy. And so the temptation is very great to step on the brakes still harder, but I think that would be a great mistake and I trust it will not be made that we shall continue to keep definite but moderate pressure on the rate of monetary growth. Now let me turn to the problem of the balance of payments. That is of course closely related to the problem of inflation. There is no doubt that if the U.S. were to continue a very rapid price growth by our standards and if the rest of the world were able to keep its rate of price growth down, the U.S. balance of payments would deteriorate. But if we get a reasonable rate of control, 7

8 a reasonable control over our inflation so that we can cut it down from its present 5% to 3% or 2% and then 1% then in my opinion the one problem that the U.S. does not have to worry about is the balance of payments. Germany has to worry about it, France has to worry about it, Britain has to worry about it, Italy has to worry about it, but the U.S. does not have to worry about it. And the fundamental reason for that is because the fact is the world is on a dollar standard. Those are words nobody likes to speak, because, for one reason or another it is not politically popular in the rest of the world to recognize that the dollar has now become to the international world what the pound sterling was at the end of the 19th century. Great Britain had no balance of payments problem at the end of the 19th century. Why? Because sterling was the currency of the world. The U.S. has no balance of payments problems now. Why? Because the dollar is the currency of the world. You will say to me, but the U.S. has been worried about its balance of payments problems, look at the measures it took, the exchange controls, the interest equalization tax. Of course, everybody makes mistakes and the U.S. is far from immune. The U.S. had not recognized the change in its situation and more important had continued to try to keep the price of gold on the world market at $ 35 an oz. But I believe it has not been recognized how drastic a change in the world monetary situation has been produced by the so-called two tier system on gold. A year ago the price of gold was set free in the London market. We now have a free gold market and the U.S. is not committed to peg the world price of gold. The result of that is that there is no way in which the dollar can be in trouble. Let me ask you, consider the situation of people who said there may be a run on the dollar, you may have a dollar crisis. How? Who can run the dollar? People who have dollars can buy gold. That drives up the price of gold. The people who sell the gold will have the dollars. What are they going to do with them? People who have dollars may conceivably want to hold German marks. Are they going to want to convert them into French francs, into British pounds? Where are they going to run to? Suppose they run into German marks. Suppose that people who hold dollars buy German marks or buy Italian lires. That merely means that the central banks of Germany and Italy have a problem. They have dollars. What are they going to do with their dollars? Well you might say they will come to the U.S. and ask for gold. We promised to give them gold at $ 35 an oz. So we have. And if they come and ask for $ 20 million of gold? Or even for $ 200 million as Italy did recently, and if at the same time France is selling us some gold, well then they may get the $ 200 million. And let me emphasize, I am speaking entirely as a private individual, I am not letting anything out of the bag. This is purely an irresponsible academic talking. Well let us suppose that Italy, to take a particular example, were to come to the U.S. treasury and say we want a billion dollars of gold. What answer would they get? You know and they know as well as I do that the answer would be: Are you sure you need a billion dollars of gold for monetary purposes? And Italy would go home and think it over. And if she said yes we really need it for monetary purposes I find it hard to believe that the U.S. treasury would not reply, Well your judgment is different from ours. And if I can conjecture this I think Mr. Carli can conjecture this. And I think every central banker in Europe knows that the price of gold is $ 35 an oz. so long as nobody asks for a lot of gold. Suppose they do. From the U.S. point of view, if we close the window what harm is done to the U.S.? The U.S. has nothing to lose by closing the window. The gold price is maintained at $ 35 an oz; the fiction of an official $ 35 an oz price of gold is maintained in my humble opinion for the 8

9 protection of the European central banks. Because if the window were closed the European central banks would be face to face with the question, do we want to recognize openly and explicitly that we are on the dollar standard? Or do we want to float our currency? They have no other choice. What else can they do? What else can you do with the dollars? You can buy American goods, or you can offer to sell your dollars at a lower price in terms of your currency and so the German central bank would have to say; Do we want to appreciate? Do we want to float? And the French central bank, and the Italian central bank would have to make the same decision. As it is the fiction that gold is available at $ 35 an oz provides concealment for the naked emperor, the European central banks can say: Oh we are not on a dollar standard, we are on a gold standard. And so they are as long as they don t ask for gold, they are on a gold standard. This is not a bad situation. I am not complaining about the situation, I am stating the facts. Private people cannot stage a run because there is no place to run to. If the world is effectively on a dollar standard this does not mean that exchange rates must all remain the same. When the world was on a gold standard there were many different exchange rates. It makes me think of the words of Franklin Delano Roosevelt in 1933 who said: We have nothing to fear but fear itself. The U.S. has nothing to fear about the balance of payments but fear about the problem of the balance of payments. The only problem about the balance of payments for the U.S. is not to let it lead the U.S. to do the wrong things as it has in the past. It was a great mistake on our part to impose exchange controls. It was a great mistake on our part to put on the interest equalization tax. The effect of that was only to reduce the attractiveness of the dollar and to stimulate the Euro-dollar market. I hope that we have gotten more sense. The new administration has pledged itself to remove the exchange controls. It has already made a major step in that direction, by liberalizing the controls on foreign investment and foreign lending and by reducing the interest equalization tax. Personally I would favor abolishing those controls immediately, but politicians are more conservative, and they will do it, as I said somewhere, they will cut the dog s tail off an inch at a time. But to conclude! I believe we have no problem about the balance of payments. To summarize then on the subject of inflation, the U.S. is now headed in the direction which will bring an appreciable reduction in the rate of inflation within 6, 9, 12 months. So far as the balance of payments is concerned I trust we are headed in the direction of removing whatever residual restraints there are on our balance of payments. So far as the world is concerned there may be a financial crisis. You may well have a franc crisis, or a German mark crisis, or a lire crisis, or a pound crisis, but for the world financial community any crisis that does not involve the dollar is not a major catastrophe. And as I say, there cannot be a crisis involving the dollar. So there will be opportunities for you gentlemen to profit by moving from one currency to another. There will be headlines for the journalist to write. There will undoubtedly be exchange rate changes, but there will be no international financial collapse or crisis of any major magnitude that will really be seriously disturbing to the world economy. Notes 9

10 * Address delivered at the Bache Institutional 1969 Seminar, sponsored by Bache and Company, Geneva, Switzerland, 25 April /26/13 10