hello, i'm robert mackenzie at

the harper library of the university of chicago. almost everyone here. like every family, the united states has suffered one of the great evils of our time inflation. spiraling prices, bring unemployment and threaten to undermine the savings of the whole people. well, now we've all agonized about this problem. milton friedman has spent many years analyzing it, and he's convinced he understands the cure. as you'll see in this film.

the sierra nevadas in california, 10,000 feet above sea level in the winter, temperatures drop to 40 below zero. in the summer, the place bakes in the thin mountain air in this unlikely spot, the town of bodie spring up in day. bodie was filled with prostitute drunkards and gamblers, part of the colorful history of the american west west.

is. a century ago this was a town of 10,000 people. what brought them here? gold if this were real gold, people would be scrambling for it. a series gold strikes throughout the west brought people from all over the world all kinds of people. they came here for one purpose and one purpose only to strike rich quick. but in the process, they built cities in where nobody would otherwise have of building a city gold built these cities. and when the was exhausted, the cities collapsed, became ghost towns. many of the people who came here ended up the way they began

broken or unhappy. but a few struck it rich for them. gold was real wealth, but was it for the world as a whole? people couldn't eat the gold. they couldn't wear the gold. they couldn't live in houses made of gold because there was more gold. they had to pay a little more gold. buy goods and services. the prices of things in terms of gold went up at tremendous cost. at of lives. people dug gold out of the bowels of the earth. what happened to that gold? eventually, at long last, it was transported distant places only be buried again under the ground. this time in the vaults of banks throughout the world, there's hardly that hasn't been used for money. rock salt. in ethiopia. brass rings in west africa. cowry shells in uganda. even a toy.

anything can be used as. money. crocodile money in malaysia. absurd isn't it? that beleaguered minority of the population still smokes may recognize this stuff as the raw material from which their cigarets are made. but in the early days of the colonies, long before the united states established this was money. it was a common money of virginia, maryland and the carolinas. it was used for all sorts of things. legislature voted that it can be used legally to pay taxes. it was used to buy food and housing. indeed, one of the most interesting sites was to see the husky young fellows at that time lug 100 pounds of it down to the docks to pay the costs, the passage of the beauty young ladies who had come over from england to be their brains. now you know how money is. there's a tendency for it to grow for more and more of it to

be produced. and that's what happened with tobacco has more tobacco produced? there was more money. and as always, when there's more money, prices went up. indeed, at the very end of the process, prices were 40 times as high in terms of tobacco as they had been at the beginning, the process. and as always, when inflation occurs. people complained. and there's always a legislature tried do something and there's always the little avail. they prohibited classes of people from growing tobacco. they tried to reduce the amount of tobacco grown they required people to destroy part of their tobacco. but it did no good. finally, many people took it into their own hands and they went around destroying people's tobacco fields. that too much. and they passed a law making it a capital offense punishable mumbai death to destroy somebody else's tobacco. gresham's one of the oldest laws and economics was well illustrated. did that law says that cheap

money drives out dear money and so it was with tobacco. anybody who had a debt to pay of course tried to pay it in the worst quality tobacco he had. he saved the good tobacco to sell overseas for hard money. the result was that bad money drove out good money. finally, almost a century after they had started using tobacco as money, they established warehouses in which tobacco was deposited in barrels certified by an inspector. according his views as to its quality and quantity, and they issued warehouse which people gave from one to another to pay for the bills that they accumulated. these pieces of green printed paper are today's counterparts of those tobacco certificates, except that they bear no relation. any commodity. in this program. i want to take to britain to see how inflation, the social fabric

of society then to tokyo, where the japanese the courage to cure inflation to berlin. where there is a lesson to be learned from the west germans. and how so-called old cures are often worse than. the disease. and to washington, where our government keeps these machines working overtime and i'm going to show you how inflation can be cured. the fact is that most people the early stages of the inflationary process. now that britain in the swinging sixties there was plenty of money around. business was brisk, jobs were plentiful and. prices had not yet taken off. but everybody happy at first.

but by the early seventies, as a good times rolled along. prices started rise more and more rapidly, with soon, some of these were going to lose their jobs. we have got in the the party was coming to an end shut down by the we're on top of the shall. the story is much the same. the united states. only the process started a little later. we've had one inflationary party after another, yet we still can't seem to avoid them. how come. before every election our representatives would like to make us think. getting a tax break and they're able to do it while at the same time actually raising our taxes because of a bit of magic. they have in their kitbag. that magic is inflation. they reduce the tax rates. but the taxes have to pay go up

because we are automatically shoved into higher brackets by the effect of inflation. a neat trick. taxation without representation. the more i work, it seems like more they take off me. i know if i work an extra or two extra days, what they take in federal income tax alone is is almost doubled because it puts you in a higher income tax bracket and takes more off you. bump crawford with his wife and three children in a suburb of pittsburgh. they're a fairly average american family don't slam the door downing. all right how you doing make in favorite dish. yeah. we went to the crawfords home after he'd spent a couple of days working out his federal and state income taxes for the year for benefit. he tried to estimate all the other taxes he had paid way.

in the end, he didn't discover much that will surprise anybody. inflation going up. everything's getting more expensive no matter what you do. as soon as you walk out of the house going up your gas bills keep going. electric bills, your gasoline. you can name a thousand things that are going up, but just everything's sky high. your. my wife goes to grocery store we used to live on, say. $60 or $50 every two weeks just for our basic food. it's 80 or $90 every two weeks. things are just they're going out of sight as far expense to live on. when i say it's getting tough and the seems like every month it gets worse and worse and, i don't know where it's going to end. at the end of the day. i've spent nearly $6,000 of my earnings on. that leaves me a total of

$12,000 to live on. that might like a lot of money, but five, six years ago, i was earning $12,000. how does taxation representation really affect? how much the crawford family has left to spend after it's paid income taxes? well, in 1972, bob crawford earned $12,000. some of that income was not subject to income tax. after paying income tax on rest. he had this much left spend. six years later, he was earning $18,000 a year. by 1978, the amount free tax was larger. but was now in a higher tax bracket. so his taxes went up by a larger percentage than his income. however, those weren't worth anything like as much. even his wages, let alone his income after taxes, hadn't kept up with inflation.

his buying power was lower before that. his taxation without representation and in practice we had a number of you better to sitting here today that were with us all night committee and i'd like to tell you one of the thing there are many scapegoats blamed for inflation. how often have you heard inflation blamed on labor unions for pushing up wages, costing the workers course? don't agree. but this is not true. this a subterfuge. this is a myth. your wage rates are not creating inflation. and he's right. the higher wages mostly a result of inflation than a cause of it. economists in this country, indeed the impression that unions cause inflation arises partly because union wages are slow to react to inflation, inflation and, then there's pressure to catch up on a day to day basis, trying to represent

own members that in fact is not the case. not only can we not play catch up, we can't even maintain a wage rate. commensurate with the cost living. it's going up in this country. another scapegoat for is the cost of goods coming from abroad. inflation, we're told, is imported higher prices abroad, driving prices at home. it's another way government can blame someone else for inflation. but this too is wrong. the prices of imports in the countries from which they come are not in terms of dollars. they're in terms of lira or yen or foreign currencies. what happens to their prices in dollars depends on exchange rates, which in turn reflect inflation. in the united states.

since 73, some have had a field day blaming the arabs for inflation. but if high oil prices were the cause of inflation, how it that inflation has been less here in germany country than most important. every of oil and gas that it uses on the roads in an industry then example it is in the united states which produces half of its own oil. japan no oil of its own at all. yet at the very time that the arabs were quadrupling oil prices, the japanese people were bringing inflation down from 30 to less than 5% a year. the fallacy is to confuse particular like the price of oil prices in general. back home, president nixon understood this now here's what i will not. i will not take nation down the road of wage and price controls. however, politically expedient

that may seem the cause and may seem like an easy way out, but they are really an way in. the more trouble they that follows when you try to clamp a lid on a rising head of steam without bringing down the fire under. the pump. wage and price only postpone a day reckoning. and in so doing, they rob every american of very important part history. now, listen to this the time has come for decisive action action that will break the vicious circle of spiraling prices and costs. i am today ordering a freeze on all prices and wages throughout the united states for a period of 90 days. in addition, i upon corporations to extend the wage price freeze to all dividends. many a political leader has been tempted to turn to wage and price controls despite their

repeated failure in practice. on this subject, they never seem to learn. but some lessons may be learned that happened to british prime james callahan, who finally discovered that a very different economic myth was wrong. he the labor party conference about it in 1976. we used to think that you could use your way out of a recession and increase employment, cutting taxes and boosting government. i tell you, in all candor that that option no longer exists. it only works on education since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployed as the next step. that's the history of the last 20 years. well, one thing to say it. one reason why inflation does much harm is because it affects

different groups differently. some benefit and of course, they attribute that to their own cleverness. some are hurt and of course they attribute their to the evil actions of other people. and the whole problem is made far worse by the fault cures which government adopts, particularly wage and price controls. the garbage in london felt justifiably aggrieved because their wages had not been permitted to keep pace with the cost living. they struck hurting not the people who impose the controls, but their friends and neighbors who had to live with mounting piles of rat garbage. hospital attendants felt justifiably aggrieved because their wages had not been permitted to keep up with the cost of living. they struck hurting not the people who imposed the controls, but cancer patients who were out of hospital beds. the behaved as a group in a way

they never would behaved as individuals. one group is set against another group. the social fabric of society torn apart, inflicting that it will take decade to heal and all to no avail because wage and controls far from being a cure for inflation, only make inflation worse within the memory of most of our political leaders. there's one vivid example of how economic ruin can be magnified by controls and a classic demonstration of what to do when it happens. germany, 1945. a devastating country, a nation defeated war. the new governing body was the allied control commission representing the united states. britain, france and the soviet union. they imposed strict controls on practically every of life,

including wages and prices. along with the effects of war, the results were tragic. the basic economic order of the country began to collapse. money lost its value. people reverted to primitive barter. or they used cameras, fountains, cigarets whiskey as money. that was less than 40 years ago. this is germany as we know it today. transformed into a place a lot of people would to live in. how did they? their miraculous recovery. what did they know? that we don't know. early one sunday morning, it was june 20th, 1948, the german minister of economics, ludwig erhard, a professional economist, similar, introduced a new currency.

today's deutschmark and one fell swoop abolish almost all controls prices and wages. why did he do it on a sunday morning? it wasn't, as you might suppose. the stock markets were closed on that day. it was as he loved to confess because the offices of the american the and the french occupation authorities closed that day. he was sure that if he had done it when they were open, they would have countermanded the order. it worked like a charm. within days, the shops were still full of goods within. the german economy was along at full steam. economists weren't surprised the result. after all, that's what a price system is for. but to the rest of the world, it seemed an economic miracle that a defeated and devastated country could, in little more than a decade, become the strongest economy on the continent of europe.

in a sense, this city, west berlin, is something a unique economic test to set as it is deep communist east germany. to fundamentally different economic systems here in europe. ours and. theirs. separated by a political philosophies definitions of and a steel and concrete wall.

to digress from inflation, economic freedom does not stand alone. it's part of a wider order. i wanted to show you how much difference it makes by letting you see how the people live on the other side of that berlin wall. but the east german authorities wouldn't let us. the people over there speak the same language as the people over here. they have the same. they have the same forebears. they are the same people. yet you don't need me to tell you how differently they live. there is one simple explanation. the political system there cannot tolerate economic freedom. the political system over here

could exist without it. but political freedom be preserved unless inflation is kept in bounds. that's the response ability of government, which has a monopoly over places like this. the reason we haven't inflation in the united states or for that matter anywhere in the world is because these pieces of paper and the accompanying book entry for their counterparts in other nations are growing more rapidly than the quantity of goods and services produced. the truth is, inflation is made in one place in one place only here in washington. this is the only place where there presses like this to turn out these pieces. paper we call money. this is a place where the power resides to determine how rapidly the amount of money shall increase.

what happened to all that noise. that's what would happen to inflation if we stopped letting the amount of money grow so rapidly. this is not a new idea. it's not new cure. it's not a new problem that's happened over and over again in history. sometimes inflation has been cured way on purpose. sometimes it's happened by accident. during civil war, the north in the civil war overran the place in the south where the printing presses were setting up, where the pieces of paper were being churned out. prior to that point, the south and had a very rapid inflation. if my memory serves me right, something 4% a month. it took the confederacy something over two weeks to find a new place where they could set

up their printing presses start some going again. during two week period, inflation came to a halt. after the two week period when the presses running again inflation up again. it's that clear that straight forward more recently there's another dramatic example of the only effective way to deal with rampant inflation. in 1973, japanese housewives going to market were faced with an unpleasant fact. the cash in their purses seemed to be losing its value. prices were starting to soar. as the awful story inflation began to unfold again. the japanese government knew what do. what's more, they prepared to do it. when it was over, economists were able to record precisely

what had happened. in 1971, the quantity of money started to grow more rapidly. as always happens, inflation wasn't affected for a time. but by late 1972, it started to respond. in early 73, the government reacted. it started to cut monetary. but inflation continued to soar for a time. the delayed reaction made 1973 a very tough year of recession. inflation tumbled only when the government demonstrated its determination to keep monetary growth in check. it took five years to squeeze inflation out of the system. japan relative stability. unfortunately, there is way to avoid the difficult road the japanese had to follow before they could have both low inflation and a healthy economy. first, they had to live through a recession until. slow monetary growth had its

delayed effect on inflation. inflation is, just like alcoholism in, both cases. when you start drinking or when you start spending too much, the good effects come first. the bad effects come later. that's why in both cases, there's a strong temptation to overdo it, to drink much, and to print too much money. when it comes to the cure. it's the other way around. when you stop or when you stop printing money, the bad effects come first. and the good effects only come later. that's why it's so to persist with the cure. in the united states, four times in the 20 years after 1957, we undertook the cure. but each time we lacked the will to continue. as a result, we had all the bad effects and of the good effects. japan, on the other hand, by sticking to a policy of slowing down the presses for five years

was by 78, able to reap all the benefits. low inflation and a recovering economy. but there's nothing special about japan. every country that has had the courage persist in a policy of slow monetary has been able to cure inflation. and at the same, achieve a healthy economy economy. and here the harper library and the university of chicago are distinguished guests, have their own ideas. so let's join them now. if you can control the money supply, you can certainly cut back or control the rate of inflation. i'd have to say that that prescription is a little bit easier to write than it is to fill. i think there are some other ways to do it and i would relate the money supply.

i think inflation is a measure of the relationship between money and the goods and services. that money is meant to cover. and so if you can stimulate the goods, the production of goods and services, it's helpful. it's a little tougher to control the money supply, although i think it can be done than just that you should control it because we've had the of credit cards, which is a form of money created in effect by the free enterprise system. it isn't all just printed in washington, but that may sound too defensive. i he was right in saying it was create that the inflation is washington based. mr. mark nobody's been in the firing line longer than you 17 years as head of the fed. could you briefly comment on that? and we'll around the group on i want to say 19 year i wouldn't be out here if it weren't for milton friedman today. he came down and gave us advice time to time. never taking.

he's going to do some interviewing later. i, i, i'm rather glad we didn't. all the time. and your 19 years as chairman of the federal reserve? well, the average growth in the money supply was 3.1% per year, the inflation was 2.2%. since you left, the money supply is exactly doubled the inflation rate is average 7%. and of course and recent the money supply has been growing double digit territory as has our inflation rate. may i first of all confirm two facts which have been so brought out in the film of professor friedman, namely that at the basis their relatively good perform in southwestern germany were really events. one so establishment of a new sound money which. we tried to preserve sound

afterwards. and secondly, it's a jump overnight into a free market economy. any control over prices and wages. these were the two fundamental facts of you have tried to preserve monetary stability by just tying to follow this prescription of professor friedman namely monetary discipline keeping monetary growth relatively moderate. i must, however, warn you, it's not so easy as it looks if you just if you just say governments have to have the to persist in course. yeah. nobody disagree with the proposition that excessive growth in money supply, an essential element in the inflationary process and that the real problem is not what to do, but how to have the courage and the will do it. and i want to go and start, if i may, on that subject, because i think that's what we ought to. why is it we haven't had the courage and don't? and under what circumstances

will? and i want to start with bill martin, because his experience a very interesting experience. his 19 years was divided into different periods in the first period, that average that bernard sprinkle spoke about average to very periods and early periods a very growth and slow inflation a later period of what is the was regarded as creeping inflation. now we'd be delighted to get back to it. people don't remember that at the time that mr. nixon introduced price wage controls in 1971. the control and outrage was inflation. the rate of growth inflation was four and a half percent per year. today, we'd regard that as a major achievement. but the latter part of the period when you were chairman was a period when the inflation rate was starting to creep up. and when a growth rate was also creeping up. now i go from your period. you were eloquent in your statements to the public, to the press, to every one about the evils of inflation and about the determined of the federal reserve not to be the architect

of inflation. your successor, arthur burns, was just as eloquent, made exactly the same kinds of statements as effectively and again, over and over again said the federal reserve will not be the architect of inflation. his successor mr. gee william milner made the same in the same statements in the same his successor paul volcker. he is making the same statement. now, my question to you is why is it that there has been such a striking difference between the excellent pronouncements of all chairman of the fed? therefore, it's not personal. and you you have a lot of company, unfortunately for the country. why is it that there's been such a wide divergence between? the excellent pronouncements on the one hand, and what i regard as a very poor performance on the other, because monetary policy is not the only element. fiscal policy equally important, you're shifting the buck to the economy, to the treasury yes, to the congress. we'll to. mr. brown yeah, that's right. the relationship of fiscal

policy to monetary policy as one of the important things. could you remind us, the general audience, when you say fiscal policy, what do you mean the distinction of monetary policy? well, taxation raising revenue and and spending and deficits and deficits. yes, exactly. and i think that you have to realize that when i have talked for a long time about the independence of the federal reserve, that's independence within government, not independence of the government. and i i've worked consists with the treasury to try to see that the government is financed. now this gets back to spending. the government says they're going to spend a certain amount and that it turns out they don't spend that amount and doubles the job of the federal reserve is not to run government spending it's not to run taxation. the job of the federal is to control the money supply. and i believe, frankly, i have always believed, as you know then these are excuses and not

for that's where and i differ because i think would be irresponsible if we didn't take into account the needs and what the government is saying and doing think if we just went on our own irresponsibly. i sat on this because i was in the treasury before i know i go to the fed and i know the other side of the picture. i think we the rightly came down the american people and by the electorate. every central bank in this world, including the german central bank, including federal reserve system, has technical capacity to make the money supply do over a period two or three or four months, not daily, but over a period has a technical capacity. to control it. dr. bell is that right cannot explain the kind of excessive creation that has occurred in terms of the technical incapacity of the federal reserve system or, the german central bank, or the bank of england, or any central bank in the world. i wouldn't say technically we

are incapable of doing that, although we have never succeeded in controlling money supply month by month. that's right. but i would say we can technically control it half yearly and one half year to the next. and that would be sufficient. that would be for controlling inflation. so i hope it does move a i'm an economic scientist and i'm trying to observe phenomena and i observe that every federal reserve chairman says one thing and does another. i don't mean, he does the system does. how different is your set up in germany? you've heard this problem of government getting committed to spending and the fed having one way or the other to accommodate itself to it. now, what's your position on this very interesting problem? we are very independent, the government of the government. but on the other hand, we are an adviser of the government also on the budget deficits. and they would not easily go before parliament with a deficit

in their budget, which is openly criticized, disapproved by the central bank. why? because we have a tradition, our country, that we can also publicly criticize. so government on this account. and second, if as has happened in our case to the government, the goes beyond what is tolerable for the sake of overall equilibrium. we have let it come through in the capital markets. so just to say they have up interest rates so it has thrown public criticism and that has had some effect their attitude. i think that's very important point that dr. hammond, you made because there is not a 1 to 1 relationship between government deficits and what happens to the money supply in all the pressure on the federal reserve comes indirectly. it comes because large government deficits. if they are financed in the general capital market, drive up interest rates, and then have

the right patterns in congress. their successors pressure the federal reserve to enter in and finish the deficit by printing money as a way of supposedly holding down interest rates. now, before i turn to mr. before i turn to mr. brown and, ask him that i just want to make one point, which very important. the federal reserve activities in trying to hold interest rates have put us in a position. we have the highest interest rates in. it's another example of how of the difference between the announced intentions of a policy and the actual result. but now i want to come, clarence brown and ask him to shift the buck to him and put him on the seat for a bit. the government has been going up republic, public administration or democratic administration. this is a nonpartizan issue. it doesn't matter. government deficits have been going up rapidly. republican administration. democratic administration.

why is it that here again you have the difference between pronouncements and performance? there is no congressman, no senator who will come out and say, i am in favor inflation. there is not a single one who will say i am in favor of big deficits and all say we want to balance the budget. we want to hold down spending, we want an economical government. how you explain the difference between performance and talk on the side? congress. first, i think we have to make one point. i'm not so much with the government. i am against it. i understand you. i'm minority member of congress again. i'm not i'm not i'm not directing this at you. i stand of course. and while and while the administration says you mentioned republican and democratic administrations both then responsible for increases in spending, at least in terms of the recommended it is the congress and only the congress appropriates the funds and determines what the taxes are. the president has no authority to do that. and so one must lay it at feet of the us congress. now i guess we'd have to concede

that it's a little bit more fun to give away things than it is to to withhold them. and this is reason that the congress responds to general public that says, well, i want to cut everybody else's program. but the one in which i am most particularly interested save money. but incidentally, my wife is taking care of the orphanages. and so let's try to help the orphanages or whatever it is that let me let me try to make a point. i if i can, however, on what i think is a new spirit moving within the congress and that is that inflation as, a national affliction is beginning to have an impact on the political psychology of many americans. now, the germans, the japanese, others have had this this terrific postwar. the germans have been through it twice, world war one and world war two. and it's a part of their national psyche. but we are affected in this country by the depression. our whole tax structure is built

on the depression. the idea of tax structure in the past has been to get money out of the mattress where it went. the banks failed in this country. jobs were lost and out of the woodshed. the tin box and the backyard. get out of there and put it into circulation. get it moving. get, get going. and one of the ways to do that was to encourage, because if you held on to it, the money would depreciate. and the other way was to tax away from people and let government spend it. now there's a reaction that and people are beginning to say, wait, just minute, we're not afflicted as much as we were by depression. we're now afflicted by inflation. and we'd like for you to get it under control. now, you can do that in another way and that without reducing the money supply radically, i think the joint economic committee has recommended that. we do it gradually, but the way that you can do it is to reduce tax as and the impact of government that is the weight of government and increase savings

so that the private can finance some of the debt that you have. there is no way you can do it without reducing, in my opinion, the rate of monetary and i recognizing the facts even though they ought not to be that way. i wonder whether you can reduce the rate of monetary growth unless congress actually does reduce government as well as government taxes. the problem is that every time we used demand management, we get into a kind of an iron maiden kind situation. we twist this way and of the spikes grabs us here. so we twist that and a spike over here gets us and recession has had higher basic unemployment rates than the previous recession in the last several years. and every inflation has had higher inflation. we've got to get that tilt out of society. would it be fair to say, though, that a fundamental difference is the germans are more deeply fearful of a return to inflation, having the horrifying experience between the wars

especially, we tend to be more of recession turning into depression. i think there is something in it in particular in a government would have to fear very much in the electoral prospects if. they went into such an election period with a high inflation rate, but there's another important difference. we unemployment. you'll feel that unemployment is filled with us too. but inflation is just as much feared. but there's another difference, namely, once you have got into escalating inflation, that every time the base plateau is higher, it's extremely difficult to get out of it. you must avoid getting into. now, that's a very cheap advice for me because. you know that we have. for the last 15, 20 years always studied foreign experiences and told ourselves we never get into

this vicious circle once you are in. it takes a time to get out of it. that is what i am preaching now is that we should avoid at all costs to get again into, this vicious circle, as had it already in 73, 74. it took us also four years to get out of it, as all of you were only at 8% inflation. four years to get down to 3%. so yes, yes, not now. you i think the question whether you can it in a gradualist way over many, many years or whether you don't need a sort of shock treatment. the film showed it took the japanese four years, five years by the bursting of some of the concerns is that we haven't suffered enough yet. most of the nations that have finally got their inflation taken running for office. most countries finally got their inflation under control had 30% or worse inflation. germany had much worse.

and the public supports them. we live in a democracy and we're getting constituencies that gain from inflation. if you look at people own real estate, they've done very well. and how can we get there without going through even more pain and i doubt that we will. if you ask who are the constituencies have benefited most from inflation, there are no doubt it is the homeowners but it's also the it's also the congressmen who have been able to vote higher without having to vote higher taxes there. they have. in fact, congress, in fact, voted for inflation. but you have never had a congressmen on record to that effect. it's the government civil servants who have their own salaries indexed and tied to and tied to inflation. they have a retirement benefit or retirement pension that's tied to inflation. they qualify a large fraction of them for social security as well, which is tied to inflation. so the benefits that that are not labor pricing things that are, but the one thing that isn't tied to inflation. and here i want to come back and ask why congress has been so so

bad in this area is our taxes. it has been impossible to get congress to index the tax so that you don't have the present effect or every 1% increase in inflation, people into higher brackets and forces them to pay higher tax. well, as you know, i have i know some countries do that course. canada does the indexes, the when i went i up to canada on a little weekend seminar program on indexing and came back advocate of indexing because i found out that the people who are delighted with indexing are the tax payers because as the inflation rate goes up, their tax level either maintains its same level or goes down the people who are least well, the people who are very unhappy, it are the are the people who have to plan spending because it has reduced the amount of money that the government, rather than watching it go by ten or 12 billion, you get a little to

spend in this country. the bureaucrats do every year. but the politicians are unhappy with it too. as jonathan friedmann points out. you see, the politicians don't get vote a tax reduction. it happens automatically and so you can't go back in a praiseworthy way until you constituents that i am for you. i voted tax reduction and i think ought to be able to index the tax system so that that tax reduction is automatic rather than have what we've had in the past. that is an automatic increase in taxes. and the politicians say we're sorry about inflation, but you're right and i want to i want to go and make a very different point. i sit here and berate you and you as government officials and so on. but understand very well that the real culprit are not the politicians, not the central bankers, but it's i and my fellow citizens, i always say to people when i talk about this, if you want to know who's responsible inflation, look in the mirror. it's not because of the way you spend money. inflation doesn't arise because

you got consumers who are they've always been spendthrift. it doesn't arise because you've got a businessmen who are greedy, always been greedy. inflation arises because we as citizens have been asking you as politicians to perform an impossible task. we've been asking you to spend somebody else's money on. us, but not to spend our money on. anybody else. you don't want us to cut back those those dollars for a nation, right? and therefore. well, no, i do. i mean, already had a program on that. and there's no of these programs, there will be any doubt my position on that. but the public at large has not. and this is where we come to the political will that dr. quite properly talked about it is in everybody talks against inflation but what he means is that he wants the prices, the things he sells to go up and the prices of the things he to go down. but sooner or later we come to the point where it will be politically profitable to end

inflation. this is the point and i you are making the suffering. where do you think the you know, what do you think the rate of inflation has to be in just by the experience of other countries before we will be in that position? and when do you think that will happen? well, the evidence says it's got to be over 20%. now, you would think we could learn from others rather than have to repeat mistakes. apparently, nobody can learn from history, but at the present time, we're going toward higher and not lower inflation. you said earlier, if you want to see who causes the inflow, let's look in the mirror right now for everybody watching and taking part in this. there must be some moral to that. what does need what has to be the change of attitude of the man, the mirror you're looking at before can effectively implement what call a tough policy that takes courage. i think that the man in the mirror has to come to recognize that. inflation is the destructive disease known to modern societies.

there is nothing which will destroy a society so thoroughly and so fully as letting inflation run riot. he must come to recognize he doesn't have any good choices, that there are no easy answers. and once get in this situation where the economy is sick of this insidious disease, there's going to be no miracle drug will enable him to be well tomorrow that the only choices he has. do i go through a tough period for four or five years of relatively high relatively low growth. or do i try to push it off by taking some more of the hair, the dog that bit me and get out get around it now at the cost of still higher unemployment as clarence brown said later on the only choice this country faces is whether we have temporary unemployment a short period as a sign effect of curing inflation or whether we go into a period of still higher unemployment later on and have it to do all over again. that's the only choice we face. and when the public at large

recognizes that they then elect people to congress, a president to office who is committed to less government and to less government printing of money. and until that happens, we will not currently get. dr. friedman, let me. let me differ with you to this extent. i think it is important that that at the time you are trying to get inflation out of the economy, that you also give the man in the street the common the opportunity to have a little bit more of his own resources to to spend. and if you can reduce his taxes at that time and then reduce government in that process, you give, him his money to spend rather than having to yield up all that money to government. if you if you cut his in a way to encourage to put him putting that money into savings. you can encourage the the additional savings in a private

sense to finance the debt that you have to carry. and you can also encourage the stimulation of growth in the society that is the investment into capital improvements modernization of plant make the us more competitive with other countries and we can, we can try to do it without as much painful unemployment as we can get by with don't. you think that has some value. i am all in as you know cutting government spending. i am all in favor of getting rid of the government regulation that reduces productivity and disrupts investment. and if we do that, we can cut taxes some. we should taxes. but you are introducing a confuse and that is confuse the american people. and that is a confusion between spending, taxes, the real tax on the american people is not what you label taxes. it's total spending. if congress spends $50 billion more than it takes in if governments spends 50 billion, who do you suppose pays that? $50 billion? of course, the arab sheiks paying it.

santa claus isn't it? the tooth fairy isn't paying it. you are. you. i as as as taxpayers are paying it indirectly through hidden taxation formulas. crucial thing is to cut down total government spending from the point of view of inflation, from the point of view of productivity. some of the other measures you are talking are far more important if you can see that inflation and taxes are, both part and parcel of the same thing, and if you cut spending apart and partial of the same thing, if you cut spending you well, but you take the money from them in one way or another. the average citizen. absolutely finance the growth of government. so if you cut the size of government, you can you can cut both their inflation, their taxes. that's right. if you i'm all in favor of. all right. all i'm saying is don't kid yourself into thinking that there is some painless way to do it, that just is not one other way. as productivity if you can if you can increase production, then the impact of inflation is less because you have more goods

chasing. absolutely. but you have to have a sense of proportion and from the point of view of the real income of the american people, nothing is more important than increasing productivity. but from the point of view of inflation, it's a bit actor. it would be a if we could raise our productivity from 3 to 5% a year, that would reduce inflation happened overnight, but it's part of it. it's part of the long range squeezing out. there is only one way to ease the my opinion. there's only one way to ease the pains of curing. and that way is not available that way is to make it to the american people that you are really going to follow the policy. you say you're going to. unfortunately, i don't see any way we can do that. that's and that's exactly. professor freeman. that's exactly the point which i wanted to illustrate by our own experience is we also had to squeeze inflation. and there was painful time of one and a half years, but that we had a continuous lowering of the inflation rate with a slow upward movement in the economy

since 1975, year by year, inflation down. and we had a growth rate which has led us now to full employment. so you can shorten this period i just this credibility and by a consensus you must have also with the trade unions a whole population set to acknowledge that policy and also play their part in it. then the pains be much less you see an arc these expectations are that inflation's going to get worse because it always has. this means we must disappoint in a very painful way those expectations and it's likely to take longer at least the time around. now our, real problem has not been that we haven't tried. we have tried and brought down. our real problem was didn't stick to it. that's it's and i would all to do of i would concede that that psychology plays a great perhaps even major part but i believe

that if you have savings stimulated by your system rather than discouraged by your tax system, you can finance of that public debt by private savings rather than by inflation. and result will be to ease to some degree the pain of that heavy unemployment that you seem to suggest is the only only way to deal with the problem the talk is fine. but the problem it is used to evade the key issue. how do you make it credible to the public that you are really going to stick to a policy 14 times? we've tried it four times. we've. stopped for one run there. we leave the matter for tonight and next week's program in the series is not to be the harper library by.

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