threat any time anywhere. the reputation of your department and its support by the public is at stake in the balance is. the preservation of law and order itself itself.

hello, i'm robert mackenzie. welcome again to the university of chicago campus. we're about to see part three, milton friedman's television series, free to choose. what has emerged so far that dr. friedman believes passionately that when people pursue their own economic self-interest, that in the long run everyone is better off, that's why also he's so strongly opposed to government controls. indeed, he believes america is hardly a free country because of the extent of government intervention, the economic lives of the people. now, in this program, he traces how all this developed from the crash of 1929, the depression of the 1930s, and the legacy they both left.

the lands street in new york's lower east side, 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. wall street. most of us know what happened here 50 years ago. 20 inside the stock exchange on october 29th, 1929, the market it came to be known as black thursday that the wall street crash was followed by the worst depression in american.

that depression been blamed on the failure of capitalism it was no such thing. but the myth lives on. what really happened was very different different, although things looked healthy on the surface, business had begun to turn down and mid-'ninety 29, the crash intensified and the recession so did continue bank failures in the south and 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 the united states, the failure of this bank had far effects and it need never have happened. it was something of historical accident at this particular played the role it in why did it fail it was a perfectly good bank banks that were in far worse financial shape had come under difficulties before it did and had through the cooperation

of banks been saved. the reason why it wasn't has to do with its rather character. first, its name 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 and the character of its owners, which had so much to do with, attracting a large number depositors from the many jewish businessmen in the city of new. both of them also had e alienao did not like the special advantage of the name and did not like the character of the owners as a 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 the 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 reserve bank of new york, whose directors today meet in this room, devised a plan and with the superintendent of banking in the state of new york to save the bank of the united states. their called for merging the bank of the united states, several other banks and also providing a guarantee fund be subscribed to by still other bankers to assure the depositors that the assets the bank of the united states were safe and. the reserve bank called meeting after meeting to try to put the plan to 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 morgan, refused to subscribe to the guaranty fund, and the plan was off. the next day, the bank of the united states closed its doors, never again to open for business for 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 of the depression, it paid back 92 and a half cent 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 closing the bank of the united states would have surely effects. they were wrong partly because it had so many depositors, partly because so many. the depositors were small

businessmen, partly because it was the largest bank that had ever permitted to fail in the united states. to this time, the effects far reaching. depositors all over the country were frightened the safety of their funds and rushed to withdraw them. there were runs. there were failures of banks, the droves and 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 as a consequence. of the way our banking system works, he said he'll think that when you take some cash to a bank and deposit it, the bank takes that money and sticks in a vault somewhere to wait until. you need it again to turn it

back over you. okay. how would you like this? but turns 45 and five. okay the bank does no such thing at 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 to pay you something for the use your money? the result is that if all depositors, all the bank's tried all at once to convert their deposits cash, there wouldn't be anything like enough in the banks of the country to meet their demands. in order to prevent such an outcome, in order to cut short a run, it's to have some way either to stop from asking for it or have some additional from which cash be obtained that was intended be the purpose of the federal reserve. it was to provide the additional cash to meet the demands of depositors.

want to run a rose. a classic example of how this system could and did work properly can be found over thousand miles from new york near. the great salt lake in utah. in the early thirties. some 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 open and courageous enough. do it. when fearful, deposit was 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 returned to the at their place at 8:00. i act as if nothing was happening. just have a smile on their face. if they could. and me to.

and we had for savings windows and said never leave the window, one shower or anything as we must have every window open all day. but import thing was we knew you'd have a big line there so there's no trying to hurry because the line going to continue. so we said, now when you get a withdrawal and a passbook, go back and check the signature, even though you know your friend john jones just to delay times, 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 him five cans and 20 and count it twice and handed out with a smile. the bank survived the morning, but they didn't have cash left. so in the afternoon called for more from the federal reserve bank. so the fed set up a armored car

to big sacks full of currency was brought in by the guard through the crowd. the assistant, morgan kraft came in also. so my brother grabbed mr. they said, now get upon this marble counter and tell these people that the chief up a lot of money and there's more where that came from. and they did that. mariner got and said, now you've heard that story. we're not to close. we're going to stay open as long as any of you people want your money. so don't worry about at all. of course, he had one other bank in the city and we called him and told him that he couldn't close it so. well, i can't. i haven't any money to stay open. so made him a temporary loan because we had another bank close while this run was going on the cycle of the poverty could be said stayed we'd never break the run in our bank would come till they got all all 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 called our employees all together because we knew that the next day people had been working during day and would have heard about this and. the next morning we'd have them with us. so we figured, now we can't let a crowd build up in the lobby. so we told our tellers, i says, now you pay out this just as fast as you can. so when anybody comes in the front door, they don't see a line you pay at hundred dollar bills and don't let any line develop at your window. well, it never did. so along a■s nd going in a normal fashion and the round was round 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

banks. why didn't the system prevent the great depression after 1929? because. from 1929 to 1930, after the stock crash, the federal system allowed the quantity of money to decline slowly, thereby throttling the monetary structure. by december 1930, the of money had fallen by 3%, which may not much, but a growing economy needs additional money in order to prevent deflation and problem. given this throttling of the monetary system, what happened after that was more or less. if the bank of the united 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 depositors. after all, once depositors start trying to take their money out of the banks, there is a strong tendency the quantity of money to fall. each dollar of cash is withdrawn from a bank had been backing several dollars deposits. if the federal reserve had stepped in bought government securities, a large scale provided the cash the depositors would have found that they could get money and they would have stopped asking for it. ironically, the people at the new york reserve bank knew that this was the right. no one had advocated it forcefully than benjamin strong, the first head of the bank. tragically, for america, he died two years before the real crisis. and with the death. benjamin strong, a truly man who not only the new york bank, but

was also the key figure in the entire federal reserve system a struggle. 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 a first stiff 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 when the bogoown magnw blocks away from here on constitution. despite excellent advice from new york. the system refused to by government bonds, something which would have provided to the commercial

could have met more. the insistent demand their depositors. instead, believe it or not, the systems stood idly by while banks crashed on all sides. as a heads of head of one of the banks put it, the reserve system had to keep powder dry for a real emergency. but if this wasn't emergency, what was as bank after bank? a chain reaction was in process, destroying money as it went. its process that even today few bankers understand no. 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 my customers. i put a little of that deposit in the vault as 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 books of banks were put there by an accountant's pen. but that simple fact is concealed from the individual banker because it doesn't happen inside the bank. it happens as a result of the transactions between banks. as the man 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 again in the depression, the process was working in reverse. the banks were destroying money. nonetheless, the federal reserve let happen. the end result was that by the time the whole sorry episode was over, by 1933, the quantity money in the united states had gone by a third. the slow throttling had turned

into strangulation. for every $3 of currency and deposits that people had had in 1929, only $2 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. as their monetary policy stifled any hope of economic recovery. worse still, america's depression was to worldwide because what lies behind these doors. this is of all 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 for the us gold was stored provide an excellent test of where the depression originated. if the depression started in europe or somewhere else in the world, the us would have lost gold. more gold would have flown out of the country than came in. if, on the other hand, the started in the united states, well then the opposite would happen. more gold would come in from abroad as the effects of our depression there. then one out abroad. in reality, that is exactly what happened when the international money system was on gold. the rules of game were these. the gold in united states was supposed to control the amount of money issued by the federal reserve. in turn, the amount the federal reserve issued controlled amount of money issued by the commercial, which in turn

controlled the amount of money that individual businesses and industry could get from the banks. sult a monetary structure all supposedly tied to the amount of gold in the vaults the united states. but 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. 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, its own monetary structure tied to gold. the trouble was that britain could now sell less abroad. it cut down the amount it bought from abroad, 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 of money decreased.

a depression that was already underway 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 in 1931 and 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 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 therefore moved in the opposite direction instead of the problem of too little money. we are faced with the problem of too much money. the problems of inflation that plague us today traced 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. replace it. at cambridge in england, a new orthodox emerged in the thirties, one that has remained powerful to this. it owes its influence to the brilliance of one man. john maynard keynes was unquestioned. 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 way out a way to end great depression and to avoid 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 of spending. in economists jargon, autonomous spending. what kind of spending is that? it might be investment business enterprises in building and adding to the number of 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 housebuilding was not enough to maintain full employment, then government could 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 didn't have to tax their citizens to pay for it. and along came a scientific theory offered under the most responsible auspices the justified. what they had been wanting to do all along isn't any wonder that government spending has exploded ever since. or is deficit spending even the excuse of war and on a large

scale has become the order of 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 the economy. it developed program aims 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 clear with the assistance of the national work was restarted on the great canada 534. and we hope that this is a prelude to a period of increasing prosperity in the industry. exports of cotton goods to india have increased and as a result of the quota system in the colonies 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 contributions, which the national government has made towards the improvement social conditions, has been a housing campaign. without in our history though of these measures may have been useful and indeed needed during the depression years. the lengths to which they have since been carried out would have horrified keynes. 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 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 postwar situation that he might have done so as suggested by an article he wrote just before death. the last article he 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, if he had lived decade, the postwar inflationary explosion might have been avoided. the massive growth of central government that started after the has continued ever since. if anything, it has even speeded up in recent. each year there are more buildings in washington occupied by more bureaucrats administer more laws. the greater president persuaded

the public that private enterprise was a fundamental highly unstable system. that the depression represented a failure of free market capitalism. that the government had to step in to perform essential function of stabilizing the of providing security for its citizens. the widespread acceptance of views sparked the enormous growth in the power of government. that has occurred in the decades since, and that is 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 monetary policies. followed by the us authorities, far from a failure, a free market capitalism. the depression was a failure of government. unfortunately, that failure did not end with the great depression. ever since government been

attempting to fine tune the economy in depression, far from promoting stability, the government has itself then the major single source of instability. and now we join the invited guests at the university of chicago as 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, did it very badly. the lesson i would draw is a very simple one. government unavoidable the expectations of the public are proper. government ought 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 intelligent government intervention, but i would describe much of the intervention which hasol great e intelligent. let's take a further look at this argument. just as during the depression, far from promoting, the government has itself and the major single source of instability. i don't think there is any stability. this side of the gravy side of i. i mean i don't 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 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 the you can't get perfect stability given that

you're going to have governments. given they're legitimate functions of governments. there are also risks in having the government be as active as it is today. i think that is a god that has failed. i 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, the pre-war ones. i do not think that government is the original or primary source of that instability, and i do think that simply getting rid of the government or greatly reducing it, which i'm in favor he instability. i would put it this way. there was there was a great economist with a suitably esoteric doctrine which could nevertheless be translated did as dr. friedman did in the film, a simple english at the same time as was the widespread hardship of the great depression and, the natural yearning of human beings, not repeat anything like it. so you have a coincidence of an

appropriate theory with an appropriate public sentiment. and i suppose the symbol in the united was the passage of 1946 of the employment act of that year which it was a weak measure, but it was nevertheless a public 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 to that that obligation was accepted by government, that stage? i think it's very important here. two distinguished 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 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, with social democrats and many other so-called left wing political thinkers, that the duty of so

far as it can is to itself, not only with defense and law and order and the traditional things, but also with the social welfare and the economic welfare of society. and that's a broad philosophical disaster, as milton seemed to be implying, or it a good and helpful, useful thing to happen. well, that is one of the great perhaps the greatest of all in political philosophy as to whether not it is right or is not right to believe that a society collectively should concern itself with these things and has the right have concerned itself through, law and through government and in other ways to move to try to correct these things. and i just it seems to me that americans have believed that for the last century. i mean, william mckinley ran on the slogan of a full pail, so that the notion that is government responsibility for prosperity dates the 1930s, i think is erroneous. what i wonder about after seen that film is this we have in 1929 we have the man who could have saved it dead two years and in 1946 we've got the man who might saved it dying.

so what i have to ask, is, are we doomed to find out the right answer only to. is it possible that for somebody who's recently died, rummages through the morgue? well, you know what? i think the question is a very different one. and it goes to much of the discussion this point. everybody looks for the right man. you say government those men at that time, quite right. but a system which depends the right man is a bad system. the federal reserve was a bad system because 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. it depended on a particular man working. the notion that the problem that public women brought up, that the problem is not the government interferes, but it does it unintelligent is again a demand for the right man, the man on the white horse who will know what do. my whole view is very different.

it is that it's the system that's wrong and that we've got to have a system the right way to accomplish these is to have a system which depend on whether you happen to have the right man pushing the buttons at the right time, but which relies on the un establishing a 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 stability but will produce a far higher degree of stability, a far greater level of freedom and a far greater level of prosperity than the kind thing we've had with these governmental intervention. but somebody still has to design the system. you can't take the people out of it entirely unless you're in the grave, of course. but that doesn't. the question is, i mean, it said the always fight the last war. how do we know that 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 depression or another stagflation or another

crisis, but some other thought process reversible because you argue that the public having a it 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 question. you didn't ask. i would. that it seems to me that what we're getting is the question of sort of social astrophysics and. that is, do we have an hand or are we on the war 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 regard models of who is the captain on the quarter deck 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 only repeat the question, though. the expectation having having been raised in the public mind, can you reverse this process where government is expected to produce the happy result? oh, no way. and it would be very foolish of the public which is on the whole more sensible than academics to to come th conclusion. they look around them. what do they say? they see a whole collection of visible hair attached to exon and 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 large organizations. if there's again, you're an academic we're talking about fact in history. now, the history is that the growth of government not been as a result of the things you're pointing out. it isn't the large corporations. it isn't large unions, it isn't the technological development that has produced the major growth of. the major growth of government. our time has come in the redistribute of area. it's come in the area of designing programs which take from some people give to others. we're not going to go into those here. we discuss those in our next two programs which deal with exactly the question of whether the government intervention that was stimulus 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 war, immediately after world war two, it was thought that government was going to get involved, especially in britain in france,

in central planning on the lines of the war experience too, when government very much involved the in japan as well, germany and japan as. well and it's a war created a myth just as the as the great depression or rather reinforced the myth of government responsibility. yes. but it created the different myth. it's this is a subject 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 this. but the great but the great myth that was created, the war was a myth that government was efficient and it was. we went for wartime purposes in at least in in in the united states. it wasn't so efficient 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 objective, one solitary objective. when the one. 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, a complex world and us the question of whether people's opinions can be changed. yes, i can't change their opinions you can't change their opinions, but experiences 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, you get the genie back into the bottle is a very important. it is undoubtedly true that in democratic countries there will be a public urge expressed through the political process for something to be done about anything that seems to be wrong the one thing that inhibits that 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 they that the government does not control the weather. it was widely believed under the gold standard and pretends that there was nothing the government could do about the kind economic trade cycle depressions that we had before that time, since it is very widely believed, milton may believe, i may believe wrongly, but nonetheless it's very widely believed that that is now manageable thing and therefore the demand is expressed that unemployment should not rise to high inflation should not rise too high and so forth.

if a war on want or a war on poverty if you believe as milton does on this issue, i agree with him that in fact, cannot handle this issue. and you want 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, not intervene. it will not perform. it will just be a simple moínetary 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 objectives that they have, which are basically high unemployment, 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 will rightly not believe that simply going back to where we were or where we imagined that we were in 1930 or 1870, by withdrawing 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 i'm not putting up a view and no government. i'm putting up a view of a limited government. limited the question of how, you know, you're supposed to. note that today the budget of agw is one and a half times the whole defense budget. that is not where the major growth government has come. whether we spend too little or too much on the military is a very arguable issue i'm not competent to discuss, but is not the cutting edge of the dispute that we're engaged in. that cutting edge is on all these other functions which government has increasingly taken on its shoulders. how to get from here to there by persuading people to do it and by doing it gradually, do not get it overnight. cab a very, very persuasive element on on getting rid of one branch of regulation. the failure of government to the full employment, the stable prices that was promised another you know what who are we kidding? is there anybody around anymore really believes the government

knows how to prevent that by its methods inflation or unemployment and we've had increasing inflation we've had increasing unemployment not only in the government but it seems to me that we're talking at least four kinds of government intervention of differing popularity. among the public. one is redistributive via the social security system and so on. and lots of that is popular welfare is unpopular, but social is quite popular. medicare has a mixed reputation, medicaid, a bad reputation, and the redistribute, redistribute bit of system is a mixed some of the public standpoint. another kind of intervention often 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, and to to

poor it's partly a safety kind of thing, partly an economic kind of thing. i doubt that the public prepared, for example, to eliminate the food and drug administration, take the way of trying to smooth out the business. all right. now wait on that. i think that the record of doing this and its clumsy way, republicans, democrats, assorted administration in england and elsewhere. between 1945 and 1973 was quite good. average unemployment during considerable span of years was lower than had been probable 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 one that came to intervention. if we use that as label work pretty well for a whole generation.

now anything that works for a whole generation isn't entirely birthed from the fact from fact and the undeniable fact that things are working poorly now. are we to conclude that the keynesians of mixed regulation was wrong? or i'll it to believe that we need still more regulation? that's my conclusion. i might say. you want right people manipulating the the levers but go back memory things out if you really look at 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, the korean war. it was a period was punctuated by three recessions in the course of about years in the fifties and early sixties. it was a period in which you had inflation really starting to go from creeping to running in the latter sixties. it was a period which 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. we all worried about it and so on. but it was a thing. little potatoes. the same thing true in earlier periods between great depressions. if you take the between the great depression in the united states of the 1870s and the 1890s, again, you had a period like that. if you take it between the great depression of the 1890s and world war one, with the minor, with one minor exception, it was similar to that. so then what you have and this is a historical fact, is that except for the great depression, all of which are linked to monetary collapse and the governmental involvement in the interim period, this has been reasonably stable and we reached a stage incidental where we did not again see anything like the great depression. you say recessions. yes, but there is no relationship to what we knew in the thirties.

have we solved that problem now? people are deeply now? i don't think we have because i think the seeds it remain there. i do not with professor mccutcheon that everything was i don't want to miss paraphrasing did pretty well until 1973 and suddenly all went wrong. it seems to me that the seeds of the subsequent instability were there before that each time round the economic cycle, inflation went a little faster. each time round 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 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, but i want to put more into it leaves big capital entirely free to operate. now he doesn't mind that in response to. big capital, you are bound to get as a simple reaction. big labor. he doesn't that he's quite happy with that. but my contention is that once you have 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 set rewards above what call the market clearing price for labor. they set levels of reward which make it impossible that everybody should be employed, if they have to have a built in tendency to high unemployment. if governments react that. on the keynesian pattern by trying to inject which will enable these people to be employed. then i agree with professor friedman that all you get is faster and faster inflation and and that, if you like is caused by the but the government is a proximate of an original instability that is there and there's nothing in professor friedman's which would correct that inherent contradiction or flaw in classical western political economy. you and i. peter, i want to ask you one question of do you deny that big government plays a large part in the rise of big capital and big labor? i think that interactive i once said big, big capital causes big labor causes big government, causes big failure. and that is the tragic story in

20th century we have to unravel that. if start that root with big government will be wrong. big government causes big capital costs. big labor costs. i don't i don't think historically that's what's happened. but you and are agreed we don't want big government that's what i disagreed is what else we need. i think something a seriously wrong with aeach develops this big clumsy aggressive government, huge corporations with more influence over their markets and is desirable from the standpoint of free competitive theory. trade which at least according to some opinions, have a similarly malignant influence on their markets. there must be something radically flawed with a capitalist system which allows these institutional developments. this doesn't allow me because i'm a social, but i would i would readily must be something radically wrong with socialist philosophy, which allows the the the extraordinary the much worse

developments that have occurred wherever there has been real significant attempt to put a thoroughgoing socialism into practice. socialism is the word of many meaning, so i think we might easily get into a quite serious debate. right. i think it's possible to note in passing that they may both be right that conventional capitalism, conventional as conceived in the 20th century, are both wrong, that the polarization of the debate between simple two alternatives greatly the real range of political, economic 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, oh, well, was a wrong brand of socialism. that was adopted or the wrong people running yourself. no federal reserve in 1929 failed to do the right thing, was the wrong brand of capitalism. it was the wrong brand, absolutely. but what i'm saying is something different can at least point to examples in history of systems

of capital systems in which the government had a fairly limited role. not my ideal government. many things or doing many things i would not want to do. but can to point to point to such exag sttches of history in which have been relatively successful, where the major achievements of humankind, not merely in economics but in all other areas, have largely arisen. it is very difficult to point to any similar examples of where big government has achieved success. but you said before, i'd like to go. you're now talking about going back took place. i didn't say i didn't like to go. what i said is going back or forward is irrelevant. what we want to know, i every discussion because as public has been said earlier things increased in scale on the scale of business has increased. and you were saying just before. big government. big labor, big industry, big firms go together and. you didn't accept it before bob said you accept it now for. no, i don't accept it. what? i accept is that big government is a major factor promoting big

labor and capital. i did not accept that in the absence of big government, you would have the big capital and big that worries him. we don't think the big government will erode. we're doing here not with it. i mean, defense. i don't think big government is like defending death and tax talking. man, anybody was in favor of big government today. today i met bob. look at the issue favorite. i make up. i make a living by making after all certainly not without politics. and on the floor what i was going say is i think most us are not in favor of big government a theory. the question that keeps haunting me here is how do you going to your question of just the monetary regulation? how do you make and let's assume that you can really we'll go a step further and we'll say we'll

go the way with you. are we will install that. what makes you think that when the storms arise that that the people running that max mechanism are not going to misread just as they did in the past? because i'm going to have if i my way, i would have a mechanism which didn't require them to read anything in other words, simply a money formula afternoon is cranked out in to the gfc regardless. right? how are you going to keep them tampering with this black box that you have a thing? i'm not to have a black box. i'm going to have a very visible i've written out and as you know, i know that's a great detail. what i would do will calculate this, but then there's going be someone who'll come in, the people that dislike and 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, a democratic society, by establishing both a written, an unwritten and the

unwritten is just as important as a written and unwritten constitution on the part of the public at large and of the view that this is not what people in government ought to be doing, that they're sacred to measure. well, if you want a monotonous profession for it in a theological sense. oh, but unfair criticism, professor friedman say, is a bad doctor because people won't actually take his medicine mean that is not fair. but it does seem to me and i say it again that to reduce whole debate to one you're in favor of big government or small government to say that is the only interesting or important political economic choice we had to make is very foolish. and if you put it in that form in practice, in democratic societies, people go on backing, supporting and paying for big government because unless you in addition pointing out the errors, defects, weaknesses, failures of government, you also describe in some detail and 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 to pick it up and they will see whether or not you approve of the phrase or whether not i approve of the face of going back to something. they're glad to have got away from. the question of how you draw the lines and where you draw the 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 comers. i don't think that the public is going to know i should choose ideologically. i think it's going to favor disfavor certain activities of government out of its experience by its perception of what's good, its own interests and so on. and my i don't preclude the possibility that there will be a different mixture by the public which will lead to a shift in the functions of government. but i think at least as possible that after the shift occurs, government will 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 you're talking about and have the very big h w yes. and more easily, i think. unfortunately, you're right. now, could you dilate on? no, no. i mean, i with you. i agree with nick. these are separable issues. and peter jay is will agree with that, too. in fact, he and i are in almost complete agreement the desirable monetary policy where we differ is on these other policies. 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 government on agw, have all sorts of regulation, have tariffs and all other things. with respect to peter jay's more general statement, it's impossible not to agree with his statement becaus's it's it concentrates on objectives and

not on means. and the real issue 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 very little discussion for this week and we hope that join us again in the next edition of the free to choose. of course. with next week. does government's welfare system really help the poor and needy, or is it a scandal, a waste of taxpayers money? is agw an instrument of compassionate society or is the symptom of an over governance the bureaucratic jungle? don't miss part of free to choose next week.