Economy, Great Depression And Milton Friedman 🔴 Free to Choose Part 3 Anatomy of a Crisis


Delancy Street in New York’s Lower East
hardly one of the city’s best-known sites yet what happened in this street
nearly 50 years ago continues to affect all of us today wallstreet most of us know what happened
here 50 years ago well I created inside the stock exchange
on October 29th 1929 the market collapsed it came to be known as Black
Thursday The Wall Street Crash was followed by
the worst depression in American history that depression has been blamed on the
failure of capitalism it was no such thing but the myth lives on what really
happened was very different although things look healthy on the surface
business had begun to turn down in mid 1929 the crash intensified the recession
so did continuing bank failures in the South and Midwest but the recession only
became a crisis when these failures spread to New York and in particular to
this building then the headquarters of the bank of United States the failure of
this Bank had far-reaching effects and it need never have happened it was
something of a historical accident that this particular Bank played the role it
did why did it sail it was a perfectly good Bank banks that were in far worse
financial shape had come under difficulties before it did in the head
for the cooperation of other banks been saved the reason why it wasn’t saved has
to do with its rather special character first it’s named bank of United States a
name that made immigrants believe it was an official governmental Bank although
in fact it was an ordinary commercial bank second its ownership Jewish both
its name and the character of its owners which had so much to do with attracting
a large number of depositors from the many Jewish businessmen in the city of
New York both of them also had the effect of alienating other bankers who
did not like the special advantage of the name and did not like the character
of the ownership as a result other banks were all too ready to spread rumors to
help promote an atmosphere in which runs got started on the bank in which it came
into difficulty and they were less than usually willing to cooperate in the
efforts that were made to save it only a few blocks away is the Federal Reserve
Bank of New York it was here that the bank of United States could have been
saved indeed the Federal Reserve System had
been set up 17 years earlier precisely to prevent
the worst consequences of bank failures the Federal Reserve Bank of New York
whose directors today meet in this room devised a plan in cooperation with the
superintendent of banking of the state of New York to save the Bank of the
United States their plan called for merging the bank of United States with
several other banks and also providing a guarantee fund to be subscribed to by
still other bankers to assure the depositors that the assets of the bank
of the United States were safe and sound the Reserve Bank called meeting after
meeting to try to put the plan into effect it was on again off again but
finally after an all-night meeting on December 10th 1930 the other bankers
including in particular John Pierpont Morgan refused to subscribe to the
guaranty fund and the plan was off the next day the bank of United States
closed its doors never again to open for business or its depositors who saw their
savings tied up and their businesses destroyed the closing was tragic yet
when the bank was finally liquidated in the worst years of the Depression had
paid back 92 and a half cents on the dollar had the other banks cooperated to
save it no one would have lost a penny for the other New York banks they
thought that closing the bank of United States would have purely local effects
they were wrong partly because it had so many depositors partly because so many
of the depositors were small businessmen partly because it was the largest bank
that had ever been permitted to fail in the United States up to this time the
effects were far-reaching depositors all over the country were frightened about
the safety of their funds and rushed to withdraw them there were runs there were
failures of banks by the droves and all the time the Federal Reserve System
stood idly by when it had the power and the duty and the responsibility to
provide the cash that would have enabled the banks to meet the insistent demands
of their depositors without closing their doors the way runs on banks can
spread and can be stopped is the consequence of the way our banking
system works you may think that when you take some cash to a bank and deposit it
the bank takes their money and sticks it in a vault somewhere to wait until you
need it again to turn it back over to you okay how would you like it okay the bank does no such thing it
immediately takes a large part of what you put in and lends it out to somebody
else how do you suppose it earns interest to pay its expenses or to pay
you something for the use of your money the result is that if all depositors
that all the bank’s tried all at once to convert their deposits into cash there
wouldn’t be anything like enough cash in the banks of the country to meet their
demands in order to prevent such an outcome in order to cut shorter run it’s
necessary to have some way either to stop people from asking for it or to
have some additional source from which cash can be obtained that was intended
to be the purpose of the Federal Reserve System it was to provide the additional
cash to meet the demands of depositors when a run arose a classic example of
how this system could and did work properly can be found over 2,000 miles
from New York near the Great Salt Lake in Utah in the early 30s some banks in Salt Lake
City and surrounding towns began to get into difficulties the owners of one of
them were smart enough to see what had to be done to keep their banks open and
courageous enough to do it when fearful depositors began to clamor
to withdraw all their money one of George Eccles jobs was to brief his
cashiers on how to handle the run well then we called all our employees
together and we told a bit the bank at their place at 8 o’clock I just act as
if nothing was happening just have a smile on their face if they could and me
too and we had for savings windows and we said never leave the window one
shower or anything else we must have every window open all day but important
thing was we knew you’d have a big line there so there’s no use trying to hurry
because the line was going to continue so we said now when you get a withdrawal
slip and the passbook go back and check the signature even though you know your
friend John Jones it’s just to delay time just just a mark time and then when
you pay the money out we’re not going to pay $100 bills we’re going to pay in
five tens and twenties and count it twice and hand it out with a smile
the bank survived the morning but they didn’t have enough cash left so in the
afternoon they called for more from the Federal Reserve Bank so the Federal
Reserve sent up the armored car to big sacks full of currency was brought in by
the guard crowded through the crowd the assistant manager Morgan Trask came
in also so Mariner my brother grabbed mr. Kraft he says now get up on this
marble counter and tell these people that that you’d brought up a lot of
money and there’s more where that came from and he did the Mariner got up and
said now you’ve heard that story we’re not going to close we’re going to stay
open as long as any of you people want your money
so don’t worry about it at all of course he had one other Bank in the city and we
called the EMA told him that he couldn’t close easy so that I can’t have any
money to stay open so we made him a temporary loan because got another Bank
closed while this run was going on the psychology of the public could be said
they’d we’d never break the run in our bank everybody would come until they got
all of their money out the bank survived the first day’s run it was time to
change psychology the second day was to be very different so that evening we
called our employees all together because we knew that the next day people
have been working during the day and would have heard about this the next
morning we’d have them with us so we figured now we can’t let a crowd buildup
in the lobby so we told our tellers and I says now you pay out this money just
as fast as you can so when anybody comes in the front door they don’t see a line
you pay out $100 bills and don’t let any line ever develop at your window well it
never did so long about noon time people just come in and go in in a normal
fashion and the Run was run was over it was all a question of reassuring the
public that they could get their money the Federal Reserve System was there to
ensure that this happened by supplying cash to the banks why didn’t this system
prevent the Great Depression after 1929 because from 1929 to 1930 after the
stock market crash the Federal Reserve System allowed the quantity of money to
decline slowly thereby throttling the monetary structure by December 1930 the
quantity of money had fallen by 3% which may not seem much but a growing economy
needs additional money in order to prevent deflation and problems given
this throttling of the monetary system what happened after that was more or
less inevitable if the bank of United States had not happened to fail some
other Bank would have been the victim it would have failed and would have set off
the runs once the run started the Federal Reserve could have prevented
them from having the disastrous consequences they did by stepping in and
providing the banking system in general through creating new money with the cash
it needed to meet the demands of depositors after all once depositors
start trying to take their money out of the banks there is a strong tendency for
the quantity of money to fall each dollar of cash which is withdrawn from a
bank had been backing several dollars of deposits if the Federal Reserve had
stepped in bought government securities on a large scale provided the cash the
depositors would have found that they could get their money and they would
have stopped asking for it ironically the people at the New York
Reserve Bank knew that this was a right policy no one had advocated it more
forcefully than Benjamin strung the first head of the Bank tragically for
America he died two years before the real crisis with the death of Benjamin
strong a truly remarkable man who not only ran the New York Bank but was also
the key figure in the entire Federal Reserve System but struggle for power
broke out between New York the other banks and the board in Washington New
York lost the other banks and even more the board in Washington one that was a
little noticed event but it was the first step in that massive move of power
to Washington that has dominated our lives ever since then and now this
building housed the US Treasury Department but at that time the Federal
Reserve Board also had its modest offices somewhere in the same building
the shift of power was sealed a few years later when the board got its own
magnificent temple a few blocks away from here on Constitution Avenue despite
excellent advice from New York the system refused to buy government bonds
something which would have provided cash to the commercial banks with which they
could have met more easily the insistent demand of their depositors instead
believe it or not the system stood idly by while banks crashed on all sides as
the heads of the head of one of the bank’s put it the Reserve System how to
keep its powder dry for a real emergency but if this wasn’t an emergency what was
as bank after bank closed a chain reaction was in process destroying money
as it went it’s a process that even today few bankers understand if you ask
an individual banker whether he creates money he’ll look at you as if you’re mad
of course not he’ll say I don’t create money all I do is I accept deposits from
high customers I put a little of that deposit in Roth has a reserve and I lend
the rest out I don’t create money from the point of view of the economist the
situation is very different as I’ve explained earlier most of the deposits
on the books of banks were put there by an accountant panel but that simple fact
is concealed from the individual banker because it doesn’t happen here inside
the bank it happens as a result of the transactions between banks as the men who ran the Federal Reserve
knew very well it happens when money loaned by one bank is deposited in
another bank to be loaned out yet again in the Depression the process was
working in Reverse the banks were destroying money nonetheless the Federal
Reserve let it happen the end result was that by the time the
whole sorry episode was over by 1933 the quantity of money in the United States
had gone down by 1/3 the slow throttling had turned into strangulation for every
three dollars of currency and deposits that people had had in 1929 only two
dollars were left for every three banks that were open in 1929 in 1933 only two
were left the terrible depression that followed was a direct result of bungling
by the Federal Reserve System their monetary policy stifled any hope
of economic recovery worse still America’s depression was to become
worldwide because of what lies behind these doors this is the vault of the
Federal Reserve Bank of New York inside is the largest hoard of gold in
the world because the world was on a gold standard in 1929 these vaults where
the u.s. gold was stored provide an excellent test of where the Depression
originated if the Depression had started in Europe
or somewhere else in the world the US would have lost gold more gold would
have flown out of the country then came in if on the other hand the Depression
started in the United States well then the opposite would happen more gold
would come in from abroad as the effects of our depression spread there then
1-alpha broad in reality that is exactly what happened when the International
money system was based on gold the rules of the game were these the gold in the
United States was supposed to control the amount of money issued by the
Federal Reserve in turn the amount the Federal Reserve issued controlled the
amount of money issued by the commercial banks which in turn controlled the
amount of money that individuals businesses and industry could get from
the banks the result a monetary structure all supposedly tied to the
amount of gold in the vaults in the United States but in 1930 the Federal
Reserve didn’t play by the rules it stood by as banks started to collapse
and with each one that went the money supply fell businesses and industry
inevitably began to fail Americans now pour bought less from abroad
Britain was one of the countries affected like the United States Britain
had its own monetary structure tied to gold the trouble was that Britain could
now sell less abroad it cut down the amounted bought from abroad but not by
enough under the rules of the gold standard it had to pay the difference in
gold with every bar of gold that was shipped out of Britain the amount of
money decreased a depression that was already under way in Britain got worse
British gold flowed into the United States
supposedly to form the foundation of a new slice of the monetary structure but
the Federal Reserve didn’t let it the gold was simply locked away the results
Britain remained in trouble until the 1931 had went off the gold standard
cutting the link between the amount of gold and the amount of money in the
United States suffering the worst depression in history there was plenty
of gold but to no avail although these events happened almost 50
years ago many of our policies today derive directly from them central
bankers throughout the world government officials everywhere are afraid of a new
Great Depression they have therefore moved in the opposite direction instead
of the problem of too little money we are faced with a problem of too much
money the problems of inflation that plagued us today trace directly from the
problem of deflation that plagued us from 1929 to 1933 people came to believe that free-market
capitalism had failed something was needed to replace it at Cambridge
University in England a new orthodoxy emerged in the 30s one that has remained
powerful to this day it owes its influence to the brilliance
of one man John Maynard Keynes was unquestionably one of the greatest
economists of all time like other economists of his generation
he found the Great Depression both a paradox and a challenge it was a paradox
because it seemed to contradict some of the fundamental principles that
economists had come to take for granted keynes rose to the challenge by
constructing a complex and sophisticated hypothesis which not only explained what
had been going on but also offered a way out a way to end the Great Depression
and to avoid similar episodes in the future the core of his theory was that
what happened to the quantity of money didn’t matter what really mattered was a
particular category of spending in economists jargon autonomous spending
what kind of spending is that it might be investment by business enterprises in
building factories and adding to the number of machines and adding to
inventories it might be spending by individuals to build houses or most
important of all it might be deficit spending by government if private
spending on investment on house building was not enough to maintain full
employment then government could always step in and spend enough to make up the
difference the theory of pump priming was born the theory was a godsend to
politicians that had been who had been grasping at any expedient after all
throughout the ages politicians have been only too willing to spend money
provided they didn’t have to tax they’re citizens to pay for it and here
along came a scientific theory offered under the most responsible of auspices
that justified what they had been wanting to do all along is it any wonder
that government spending has exploded ever since or the deficit spending
even without the excuse of war and on a large scale has become the order of the
day in America the new Roosevelt administration adopted the Keynesian
approach it authorized massive spending on government projects it involved
government increasingly in the running of the economy it developed programs
designed to provide security for every individual in England to the idea that
only government could bolster the economy was firmly established as this
film of the time makes clear with the assistance of the national government
work was restarted on the great cañada 534 and we all hope that this is a
prelude to a period of increasing prosperity in the industry exports of
cotton goods to India and increased and as a result of the protest systems in
the colonists which the national government introduced in order to
diminish the dangers of Japanese competition exports of cotton goods to
those colonies have been more than doubled one of the most important
contribution which the national government has made towards the
improvement of social conditions has been a housing campaign without parallel
in our history though some of these measures may have
been useful and indeed needed during the Depression years the lengths to which
they have since been carry would have horrified came Keynes died in 1946 I
have always regarded it as a tragedy that he did not live another decade he
was the one man who had the standing the personality the force of character to
persuade his disciples not to carry too far some ideas which were good for the
1930s but which did not apply in the post-war situation that he might have
done so is suggested by an article he wrote just before his death the last
article I ever wrote published after his death in that article he expressed
strong reservations about the lengths to which some of his disciples had been
carrying his ideas if he had been able if he had lived another decade the
post-war inflationary explosion might have been avoided the massive growth of central government
that started after the depression has continued ever since if anything it has
even speeded up in recent years each year there are more buildings in
Washington occupied by more bureaucrats administering more laws the Great
Depression persuaded the public that private enterprise was a fundamentally
unstable system that the depression represented a failure of free-market
capitalism that the government had to step in to perform the essential
function of stabilizing the economy of providing security for its citizens the
widespread acceptance of these views sparked the enormous growth in the power
of government that has occurred in the decades since and that it’s still going
on we now know as many economists knew then that the truth about the depression
was very different the depression was produced or at the very least made far
worse by perverse monetary policies followed by the US authorities far from
being a failure of free-market capitalism for the depression was a
failure of government unfortunately that failure did not end with the Great
Depression ever since government has been
attempting to fine-tune the economy in practice just as during the Depression
far from promoting stability the government has itself been the major
single source of instability and now we join the invited guests here
at the University of Chicago as they discuss Friedman’s interpretation of
those events and their implications for today the 1929 crash the succeeding
calamities were not the first of their kind capitalism has been subject to
severe depressions since the beginning of the Industrial Revolution this was
the first time however government tried to intervene seriously it did it very
badly the lesson I would draw is a very simple one government is unavoidable the
expectations of the public a proper government or to do better
oddly enough government did do better until very very recently until I would
say October 1973 even government did reasonably well in fulfilling the
expectations of the public I am an unrepentant proponent of government
intervention intelligent government intervention but I would describe much
of the intervention which has followed the great 1929 crash as quite
intelligent let’s take a further look though this argument that just as during
the Depression far from promoting stability the government has itself been
the major single source of instability I I don’t think there is any stability
this side of the graveyard I think I don’t think it matters what system
you’re working under you are not going to you’re not going to have a level and
hold it under any system which living human beings governments are larger now
and therefore more of a source of an influence for good and for bad and I
think like mr. von Hoffman that you can’t get perfect stability given that
you’re going to have governments given that their legitimate functions of
governments there are also risks in having the government be as active as it
is Peter J I think that government is a god that has failed I think that we have
too much of it and need less of it I think it has failed to prevent both the
modern forms of economic instability and the pre-war ones I do not have think
that government is the original or primary source of that instability and I
do not think that simply getting rid of the government or greatly reducing it
which I’m in favor of will by itself removed the instability I would put it
this way there was there was a great economist with a
suitably esoteric doctrine which could nevertheless be translated as dr.
Friedman did in the film into a simple English at the same time as there was
the widespread hardship of the Great Depression and the natural yearning of
human beings not to repeat anything liked it so you have a coincidence of an
appropriate theory with an appropriate public sentiment and I suppose a symbol
in the United States was the passage in 1946 of the Employment Act of that year
which it was a weak measure but it was nevertheless a public declaration of an
obligation of government to do something about employment and economic prosperity
and a good thing to now that’s the really the crux of the matter do you
agree it was a good thing too that that obligation was accepted by government
that stage I think it’s very important here to distinguish two completely
different issues there is a rather narrow issue as to whether Keynes was
right or wrong in believing that you could stabilize the economy with regard
to really one essential variable unemployment by a certain technique
which he talked about we may now think that he was wrong but that’s a quite
separate issue from the broad political philosophical issue associated with
socialism associated with Social Democrats and many other so-called
left-wing political thinkers but the duty of government so far as it can is
to concern itself not only with defense and law and order and the traditional
things but also with the social welfare in the economic welfare of a society now
that’s a broad philosophical disaster as Milton seem to be implying or was it a
good and helpful useful thing to happen well that is one of the great perhaps
the greatest of all debates in political philosophy as to whether or not it is
right or is not right to believe that a society collectively should concern
itself with these things and has the right having concerned itself through
law and through government and in other ways to move to try to correct these
things it seems to me that what Americans have believed that for the
last century I mean William McKinley ran on the slogan of a full dinner pail so
that the notion that this is government responsibility for prosperity dates from
the 1930s I think is erroneous what I wonder about after having seen
that film is this we have in 1929 we have the man who could have saved it
dead 2 years and in 1946 we’ve got the man who might have saved it dying so
what I have to ask is are we doomed to find out the right answer only to late
is it possible that are for somebody who’s recently died they can rummage
through the morgue you know what I think the question is a very different one and
it goes to much of the discussion to this point everybody looks for the right
man you say government those men at that time provide right but a system which
depends on the right man is a bad system the Federal Reserve was a bad system
because it depended on the right man working it the idea of demand management
of the kind of thing we’re talking about where Keynes’s death mattered was a bad
system because it depended on in particular man working it the notion
that the problem that Baba Cashman brought up that the problem is not the
government interferes but it does it unintelligently is again a demand for
the right man the man on the white horse who will know what to do my whole view
is very different it is it it’s the system that’s wrong and that we’ve got
to have a system that the right way to accomplish these objectives is to have a
system which doesn’t depend on whether you happen to have the right man pushing
the buttons at the right time which rely on the framework within which an
invisible hand within which the activities of people all over are able
jointly to produce the kind of result it won’t produce perfect stability but will
produce a far better higher degree of stability a far greater level of freedom
and far greater level of prosperity and the kind of thing we’ve had with these
governmental interests but nobody still has to design the system you can’t take
the people out of it entirely whether in the grave of course but that that was
the depressing news and it said the generals always fight the last war how
do we know the system won’t fight the last war we probably won’t have another
depression exactly like 1929 to 33 but that doesn’t say we won’t have another
question or another stagflation or another crisis but your money process
reversible because you argued that the public having been appalled by the Great
Depression in effect demanded of governments that they accept
responsibility for well-being of the economy for management of the society
and so on now that expectation having been raised can it be reversed let me
answer a question you’d in there okay that it seems to me that what we’re
getting here is the question of sort of social astrophysics and that is do we
have an unseen hand or are we on the war star where we are trying to design a
computer that is going to take care of the navigation of this thing in other
words it seems to me that that’s our central question is there a mechanism
that you can put right in the center of the spaceship that will operate
regardless of who is the captain on the quarterdeck at any one moment in time I
don’t think that’s an economic question I think that’s a question that goes to
religion well that’s not on our agenda actually I’ll only repeat the question
though the expectation having been having been raised in the public mind
can you reverse this process where government is expected to produce the
happy result all no way and it would be very foolish of the public which is on
the whole more sensible than academics to to come to this conclusion they look
around them what do they see they see a whole collection of visible hands
attached to Exxon other large corporations these are not small
independent competitors jostling with each other for the patronage of the
public these are large organizations with substantial influence on their
markets government’s interference clumsy as it often is is an almost unavoidable
response to the very visible manipulations of larger organizations if
there’s again you’re an academic we’re talking about fact in history now the
history is that the growth of govern has not been as a result of the things
you’re pointing out it isn’t the large corporations it isn’t the large unions
it isn’t the technological development that it’s produced the major growth of
government the major growth of government in our time has come in the
redistributed area it’s come in the area of designing programs which take from
some people and give to others we’re not going to go into those here because we
discussed those in our next two program through to deal with exactly the
question of whether the government intervention that was stimulated by the
Great Depression has been a success or a failure but to your point the grounds
that you give for greater government intervention have almost nothing
whatsoever to do with the actual factual growth of government now at the end of
the water immediately after World War two it was thought the government was
going to get involved especially in Britain in France in central economic
planning on a lot of the war experience to Wenger partly very much involved as
well Germany and Japan as well that is a war created a myth just as they as the
Great Depression reinforced the myth of government possibility yes but it
created a different man this is the subject we don’t discuss much in the
film we’ve discussed it in a book that we’re bringing out with the same title
to go along with olive oil but the great but the great myth that was created by
the war was a myth that government was efficient and it was we want more
wartime purposes in at least it in Britain in the United States it wasn’t
so efficient in Germany in the losing countries but why was that a myth it was
a myth because it is one thing for government to plan and to control an
economy for a single overriding objective one solitary objective when
the war it’s a very different thing for government to control the economy for
the many numerous tastes of all of us of a very large number of people in a
complex world and I you asked the question of other people’s opinions can
be changed yes I can’t change their opinions you can’t change their opinions
but experience is changing their opinions is there anybody anywhere now
who believes that government is an efficient way to run an industrial
enterprise I think your question can you get the genie back into the bottle is a
very important one it is undoubtedly true that in democratic countries the
will be a public urge expressed through the political process for something to
be done about anything that seems to be wrong but one thing that inhibits that
is the belief that it can’t be done there is no politically expressed desire
for the government to do something about the weather because it is widely
believed the government does not control the weather it was widely believed under
the gold standard in pre Keynes that there was nothing the government could
do about the kind of economic trade cycle and depressions that we had before
that time since then it is very widely believed doping they believe I may
believe wrongly but nonetheless it’s very widely believed that that is now a
manageable thing and therefore the demand is expressed that unemployment
should not rise to high inflation should not rise to high and so forth if a war
on want or a war on poverty if you believe is built endures and on this
issue I agree with him that government cannot handle this issue and you want to
get that genie back into the bottle you can’t simply do it by authorities or
pundits or academics or others saying here is a new rule the government will
do nothing from have intervened it will not perform they will just be a simple
monetary rule you’ve got politically to persuade people that this is part of a
system which they can understand which will in fact deliver for them the
minimal economic objectives that they have which are basically a high
employment high employment and stability of prices and one or two other things
now in order to do that you’ve got to describe a political economic system
which will in fact deliver that result and they will not believe and in my
opinion they were rightly not believed that’s simply going back to where we
were or where we imagined that we were in 1930 or 1870 by withdrawing the
government from the game and doing nothing else will produce that result
and they’re right not to believe it the kind of pristine view that you appear to
be putting up of no government isn’t really a consistent view because not
putting up a view and no government I’m putting up a view of a limited
government no matter the size of account how you know they pose the note that
today the budget of 80w is one and a half times the whole defense budget that
is not where the major growth of government has come whether we spend too
little or too much on the military is a very arguable issue which I’m not
competent to discover but it is not the cutting edge of the dispute that were
engaged in that cutting edge is on all these other functions which government
has increasingly taken on its shoulders so you’ll get from here to there by
persuading people to do it and by doing it gradually you do not get it overnight
CA B was a very very persuasive element on on getting rid of one branch of
regulation the failure of government to produce the full employment and the
stable prices that was promised is another you know what are we kidding is
there anybody around anymore who really believes the government knows how to
prevent by its present methods inflation or unemployment we’ve had increasing
inflation we’ve had increasing unemployment not only now it seems to me
that we’re talking about at least four kinds of government intervention of
differing popularity among the public one is redistributed via the Social
Security system and so on and lots of that is popular welfare is unpopular but
Social Security is quite popular Medicare has a mixed reputation Medicaid
a bad reputation the redistribution system is a mixed bag from the public
standpoint another kind of intervention deals with unemployment a Third Kind
deals with prices and a Fourth Kind deals with regulation now again there is
a cry about regulation which itself breaks down it seems to me into two
parts partly a safety kind of thing partly an economic kind of thing I doubt
that the public is prepared for example to eliminate the Food and Drug
Administration take the way of trying to smooth out the businesses all right now
wait on that I think that the record of doing this in its clumsy way Republicans
Democrats assorted administrations in England and elsewhere between 1945 and
1973 was quite good average unemployment during this considerable span of years
was lower than had been probably in any previous spell of modern economic
history inflation was not a persistent problem in this now I would say putting
the claim at a very modest one that Keynesian intervention if we use that as
a label work pretty well for a whole generation now anything that works well
for a whole generation isn’t entirely bad from the fact from that fact and the
undeniable fact that things are working poorly now all we to conclude that the
Keynesian sort of mixed regulation was wrong or alternatively that we need
still more regulation that’s my conclusion I might you want the right
people manipulating the the labors but go back memory smooths things out if you
really look at that 25-year period you’re talking about it was not a period
of stability it was a period that was punctuated by the very sharp inflation
of the Korean War it was a period that was punctuated by three recessions in
the course of about eight years in the 50s and early 60s it was a period in
which you had a inflation really starting to go from creeping to running
in the latter 60s it was a period which laid the groundwork for the kind of
situation in which we are now where you have both higher unemployment and higher
inflation it was the I mean there were these movements as we say but they
weren’t the movements like the 1930s there was a recession in 58 yes we all
called it a recession all worried about it and so on there was a small thing
little potatoes the same thing was true in earlier periods between the great
depressions it should take the area between the Great Depression in the
United States of the 1870s in the 1890s again you had a period like that if your
take it between the Great Depression of the 1890s and world war one with the
minor with one minor exception that was similar to that so that what you have
and this is a historical fact is that except for the great depressions all of
which are linked to monetary collapses and the governmental involvement in the
interim period the society has been reasonably stable when we reach the
stage incidentally where we need not again see anything like the Great
Depression you say recessions yes but if there is no relationship to what we knew
in the 30s have we solved that problem now people are deeply
now I don’t think we have because I think the seeds of it remained there I
don’t agree with Professor McCadden that everything was I don’t want to miss
paraphrase him but did pretty well until 1973 and it suddenly all went wrong it
seems to me that the seeds of the subsequent instability stagflation were
there before that each time around the economic cycle inflation went a little
faster each time around the economic cycle unemployment tended to be a bit
higher but this brings me to what is my disagreement with Professor Friedman I
agree with him that government has failed to correct and is bound to fail
to correct that instability I do not agree with him that it is the root cause
of that instability or simply removing or containing the government will remove
that instability because his Constitution and I agree with all the
things he wants to put into it but I want to put more into it leaves big
capital entirely free to operate now he doesn’t like that in response to big
capital you are bound to get as a simple natural reaction big labor he doesn’t
like that he’s quite happy with that but my contention is that once you have big
labor you have a way of setting rewards in society not only by trade unions but
through all sorts of other processes whereby groups get together in order to
exploit the political process and legal rights and to protect themselves from
competition in which inevitably people set rewards above what economists call
the market clearing price for labor I they set levels of reward which make it
impossible that everybody should be employed even though I have a built-in
tendency to high unemployment if governments react to that on the
Keynesian pattern by trying to inject spending which will enable these people
to be employed then I agree with Professor Friedman that all you get is
faster and faster inflation then and that if you like is caused by the
government but the government is a proximate cause of an original
instability that is already there there’s nothing in professor Friedman’s
Constitution which would correct that inherent right contradiction or flaw in
classical Western political economy nearly nine where I want to answer that
one question of you do you deny that big government plays a large part in the
rise of big capital and big labor I think they’re interactive I once said
big of big capital causes big labor causes big government causes big failure
and that is the tragic story and what about 20th century unravel it if you
start that route with big government will be wrong big government causes big
capital causes big labor well I don’t expand you identity historically that’s
what’s happened but you and I are agreed we don’t want big government that’s what
we’re disagreed about is what else we need I think something is seriously
wrong with a beautiful which develops this big clumsy
aggressive government huge corporations with more influence over their markets
than is desirable from the standpoint of three competitive theory trade unions
which at least according to some opinions have a similarly malignant
influence on their markets there must be something radically flawed
with the capitalist system which allows these institutional developments dis
dozen law me because I’m a socialist but I would I would readily ask me something
radically wrong with the socialist philosophy which allows the the the
extraordinary the much worse developments that have occurred
wherever there has been any real significant attempt to put a
thoroughgoing socialism into practice socialism is a word of many meanings so
my easy to get into the quite secret debate over I think it’s possible to
note in passing that they may both be right but conventional capitalism
conventional socialism as conceived in the twentieth century are both wrong and
that the polarization of the debate between those simple two alternatives
greatly impoverishes the real range of political economic choices which modern
societies have but what has happened over and over again one claim after
another for the kind of socialism this kind of socialism or that kind of
socialism has turned to ashes and each time the answer has come all well it was
a wrong brand of socialism that was adopted or the wrong people were running
but yourself no double reserve in 1929 failed to do the right thing it was the
wrong brand of capitalism it was a wrong brand absolutely but what I’m saying is
something different I can at least point to examples in history of systems of
capitalist systems in which the government had a fairly limited role not
my ideal government many things do are doing many things I would not want to do
but I’m going to point a point to such examples of a long stretches of history
in which have been relatively successful were the major achievements of humankind
not merely in economics but in all other areas have largely arisen it is very
difficult to appoint any similar examples of where big government has
achieved such success you said before like to go back you’re now talking about
going back I didn’t say I didn’t like to go back what I said is going back or
forward is irrelevant what we want to do is not irrelevant wherever it’s not
gushin because Pablo Carson said earlier things have increased in scale the scale
of business has increased and you were saying just before the government big
labor big industry big firms go together and you didn’t accept it before when
bonds that you’re accepted now for now no I don’t accept it what I accept is
that big government is a major factor promoting big labor and big capital I
did not accept that in the absence of big government you would have the big
capital in big labor that worries him we don’t have the big guy on the road
before I am doing here note with it I mean defending big government is like
defending definite a clucking men anybody was in favor of big government
today today I met Bob during the race you know we’re not my favorite I make a
motion I make a living by making distinctions after all certainly not
without fault ok all the news applause oh yeah but I what I was going to say I
think most of us are not in favor of big government as a theory the question that
keeps haunting me here is how do you going back to your question of just the
monetary regulation how do you make and let’s assume that you can really go a
step further and we’ll say we’ll go all the way with you or we will install that
mechanism what makes you think that when the storms arise that that the people
running that next mechanism are not going to miss read just as they did in
the past because I’m going to have if I had my way I would have a mechanism
which didn’t require them to read anything you know there were simply a
money formula absolutely is cranked out in relation to the GM you know
regardless right how you’re going to keep them tampering with this black box
did you have a thing I’m not going to have a black box I’m going to have a
very visible system I’ve written out it as you know oh I know
I have to know what I would do will calculate this but then there’s going to
be someone who come in the people that you decide to say but we could do it a
little bit better by doing it this way or that way of
course how would you keep them from doing it well in the only way in which
you can do it in a democratic society by establishing both a written and
unwritten and the unwritten is just as important as a written an unwritten
Constitution on the part of the public at large and acceptance of the view that
this is not what people in government ought to be doing but therefore the
measure well if you want but not necessarily sacred in the theological
soon go but in fact recently professor even today is a bad doctor because
people won’t actually take his medicine I mean that is that it’s not fair but it
does seem to me and I say it again but to reduce the whole debate to one are
you in favor of big government or small government as though that was the only
interesting or important political economic choice we had to make is very
foolish nowadays there it and if you put it in that form in practice and
democratic societies people will go on backing supporting and paying for big
government because unless you in addition to pointing out the errors
defects weaknesses fallibilities and failures of government you also
described in some detail and with some attraction the other changes that you’re
going to make in the non-governmental sector of the economy which are going to
give people the kind of protection the kind of opportunities the kind of
fulfillment the kind of stability the kind of prosperity that they want they
are not going to buy it because you’re offering them in a pig in a poke and
they will see it whether or not you approve of the phrase or whether I
approve of the face is going back to something which they’re glad to have got
away from the question of how you draw the lines and where you draw the lines
is a difficult one and I can’t see any possible way of somehow making a
decision on that that will stand like a like the Rock of Gibraltar against all
all coming I don’t think that the public is going to nor should it choose
ideologically I think it’s going to favor and disfavor certain activities of
government out of its experience by its perception of what’s good in its own
interests and so on and my I don’t preclude the possibility that there will
be a different mixture perceptions by the public which will lead to a shift in
the functions of government but I think it’s at least as possible that
after the shift occurs government will be perceived to have more functions as
that it will have fewer functions I it seems to me also that you could have the
monetary policy that you’re talking about and have the very big hgw etc yes
and more easily unfortunately you’re right now could you dilate on that no no
I knew this I agree with you I agree with Nick so these are separable issues
and Peter J is will agree with that too in fact he and I are almost complete
agreement on the desirable monetary policy where we differ is on these other
policies and there is certainly no doubt that you could have an essentially
automatic stabilizing monetary policy of the kind which I’ve suggested of a fixed
rate of monetary growth no discretionary intervention for cyclical purposes and
at the same time have a very big government on atw have all sorts of
regulation have tariffs and all other things with respect to Peter J’s more
general statement it’s impossible not to agree with his statement because it’s
it’s it concentrates on objectives and not on means and the real quick has to
do with means what are the most appropriate and effective means which
will give people the greatest assurance you can’t give them certainty but the
greatest assurance that they will have a reasonably stable society with
opportunity for themselves there’s a central discussion for this week and I
hope the join us again show the next video for them free to choose why three you ah you

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