Milton Friedman Teaches Monetary Policy

Milton Friedman: Now, the first step to our understanding the cause of inflation is to recognize that it is always and everywhere a monetary phenomenon. It’s always and everywhere a result of too much money, of a more rapid increase in the quantity of money than in output. Moreover, in the modern era the important next step is to recognize that today governments control the quantity of money, so that as a result, inflation in the United States is made in Washington, and nowhere else.

Of course, no government, any more than anyone of us, likes to take responsibility for bad things. We’re all of us human. If something bad happens, it wasn’t our fault, and the government is the same way, so it doesn’t accept responsibility for inflation.

If you listen to people in Washington talk, they will tell you that inflation is produced by greedy businessmen, or it's produced by grasping unions, or it's produced by spend-thrift consumers, or maybe it’s those terrible Arab sheiks who are producing it. Now, of course, businessmen are greedy, who of us isn’t? Trade unions are grasping, who of us isn’t?

And there is no doubt that the consumer is a spend-thrift, at least every man knows that about his wife. But none of them produce inflation, for the very simple reason that neither the businessman, nor the trade union, nor the housewife has a printing press in their basement on which they can turn out those green pieces of paper we call money. Only Washington has that printing press, and therefore only Washington can produce inflation.

If you listen to the people from the communist world, they’ll tell you inflation is a capitalist phenomenon, that’s not true. If you look at Europe today, one of the most rapid rates of inflation in Europe has been in Yugoslavia, which is a communist country. One of the slowest rates of inflation has been in Switzerland, which is a capitalist country.

So inflation is not a capitalist phenomenon, but neither is it a communist phenomenon. If Switzerland has low inflation, the United Kingdom, in recent years has had inflation rates running up to 20-25% a year. Italy has inflation rates today of that order of magnitude.

Inflation is not a capitalist phenomenon, it’s not a communist phenomenon it’s a printing press phenomenon. Now in saying that inflation is a printing press phenomenon, in saying that inflation is always caused by a more rapid increase in the quantity of money, than in output, you’re only at the beginning of the problem. Because you must distinguish the immediate cause from the more ultimate cause.

You must ask "Why is it that the quantity of money increases too rapidly? " but before I go onto that question, I just want to settle for once and for all, the point that inflation is a monetary phenomenon. That proposition has been documented over and over again.

We have evidence, for the United States for over 100 years, for Great Britain for 200 years, for Sweden for 200 years. There is never in history been an inflation that was not accompanied by an extremely rapid increase in the quantity of money. There is never in history, been an extremely rapid increase in the quantity of money without an inflation, but in order to persuade you of this quickly and with a minimum waste of time, I have brought a few pictures along to show you, that will graphically illustrate the proposition about the relation between money and inflation.

And I’d like to, if we can start with the first of those slides now, maybe you can make out that there are two lines on that chart. That chart is for the United States, and it covers the 13 years from 1964 through 1976. And one of those charts, the solid line, is the quantity of money per unit of output, and the other line, which is a dashed line, is a consumer price index.

Those two lines cross at 1970, because that’s the way they're constructed, both of those series were expressed on 1970 as a base of a 100, in order to try to get the two series in the same scale. But there is nothing whatsoever in the arithmetic of it to make those two curves the same elsewhere. That, and I may say, that the quantity of money that’s plotted there is a quantity of money for a year, ending six months before the price index, so that you are not, there is nothing funny about that, and you can see that the two lines are almost indistinguishable.

Now, I’ve got a segment of 13 years up there, but if I had a segment of 100 years, the relationship would be the same way throughout the whole of that period. But you may say that’s only for the United States, but what about other countries? And so, let’s have the next slide.

The next slide is for Germany, for the same period. And again, you will see the same story. Now, the interesting thing here is that you can see that the quantity of money for a while in the later, in the 70s, was running ahead of the price index, but now they’re coming back together again, and that’s a behavior you very often observe.

The quantity of money, per unit of output, is a major factor that from the immediate sense, determines a price index, but it doesn’t operate instantaneously, sometimes there are delays of a year or two, but sooner or later they all come back together. Well, the United States and Germany are very similar countries. What about another country?

Let’s have the third chart. And the 3rd chart there, it’s supposed to be for Japan, I can’t read it, is that what it says up there? That’s for Japan, and you will notice that the Japan experienced a much greater price rise than either the United States or Germany did, but Japan has now been coming back, it’s done a remarkable job of controlling the quantity of money, and as a result, the rate of price inflation in Japan has come down from close to 30% a year to where today, in the period after this chart, it’s back down to about 7%.

But again, you have the same synchronism between the two charts. Now, the next chart, let’s have the next chart, which is for Great Britain, you can see each one of these has a little more inflation than the preceding one, but each one of them, you again have the same relationship in every case, between the quantity of money and prices. Now one of the interesting things about that comparison between Japan and the United Kingdom, is you will hear many people telling you that the real reason that you have inflation is because of trade unions.

If you listen to anybody telling you about Great Britain’s plight, they will tell you that the real problem in Great Britain is that you have such strong trade unions, that they push up wages and that causes inflation. Well if that explains this relationship for Britain, what explains the previous chart for Japan, where trade unions are not very important, or much weaker than they are in Great Britain, or what explains the next chart, which is a honey, for Brazil? That’s, can we have the next.

. . the last chart?

Now that’s an inflation that’s really an inflation, that’s not one of these baby inflations we’ve been playing with. Of course, there are still better ones in Argentina and Chile, but we don’t have a big enough room. (audience laughter) Now here again, if trade unions cause inflation, as you know, Brazil has a military government, and trade unions have absolutely nothing to say about anything except as they are branches of the government apparatus, so that it’s clear, you cannot explain in the case of Brazil, the inflation by trade unions, but you can see very clearly, that you can explain it by changes in the quantity of money.

Thank you, we can have the lights back on now.