A Recent History of the Federal Reserve

0:00I have only had two comments made about my work by the Fed. On both occasions, an official spokesman for the Fed was asked to comment on stories that I had published relating to what they were doing, but on each occasion he said it was a lot of baloney. As it turned And out both the stories were very close to the mark and I was able to say subsequently the spokesman for the Fed was a liar, which is not an uncommon experience of anybody dealing I had a very bad training academically for a life devoted to writing about the dreadful things that governments and central banks do.

1:06I was educated at the University of Western Australia, which has had the advantage that when I applied to go to the University of Cambridge in England, my then supervisor at Cambridge upon receiving my application said that anybody who had managed to survive the The University of Western Australia must be good and they simply had to have him at Cambridge. When I went to Cambridge, I was educated, if you could use that word very loosely, by people such as Richard Cairn, Cairn's disciple who invented the multiplier, Joan Robinson was a Marxist, Nikki Kaldor was a quasi-socialist, Richard Goodwin an American communist on the land from the MacArthur Committee. I didn't have a hope.

2:17Anyway, I managed to regurgitate their ideas sufficiently well that I got a number of prizes while I was at Cambridge. I went into the Australian government service in the Treasury and soon found out what an appalling mess government really is. I got out of the Treasury and spent the rest of my and my professional career, opposing governments and all their works. This was not a risk-free occupation. As in 1968, I became so unpopular with the Australian government, having caused, I suppose, it would be fair to say, the breakdown and collapse of the government in 1968.

3:19That the powers that be in that government, who were very dirigist minded, raided my house, 14 Commonwealth Police and tried to put me in jail for seven years for my knowledge of Her Majesty's Secrets. In Australia it is not only illegal to give out Her Majesty's Secrets, it is also illegal to receive Her Majesty's Secrets. And I had received a lot of them. Anyway, I sued the Commonwealth government for a legal entry on my premises and won in an important landmark decision that severely limited the Commonwealth police powers of entry, search and seizure.

4:12So my attitude towards the works of governments is somewhat juandist. And today I'd like to talk about a title called The Enemies of Freedom are Alive and Well in America. A remarkable success has been achieved in American economic policy in the last four years. Inflation has been smashed and has stayed beaten during the most vigorous recovery we have had for 40 years. By now we are almost at the end of the second year in recovery from the 1978-82 recession, the longest recession in 50 years. Yet all the principal indicators of inflation are still showing negligible increases.

4:58The rate of inflation in America is in the range of 3 to 4 percent a year, and the United States has provided the driving force in the world economic expansion since 1982, far outstripping Other Major Industrial Nations and Growth of Employment and Output Commodity prices today are only 10% above the all-time low reached at the bottom of the longest recession at the end of 1982. Commodity futures prices are 25% lower than the inflationary peak reached in 1980. The real price of oil has fallen by more than a quarter from its peak. Stock prices have risen 50% since their 1982 bottom. Nominal interest rates have tumbled.

5:45The prime rate has dropped from an average of 19% in 1981 to 12.5% today. It's even possible to believe that the United States economy will achieve a soft landing in 1985, passing from the necessarily above-average growth rate in the recovery phase from the recession to the necessarily lower growth rate that is possible over a long period of time, the feasible or secular growth rate set by wide parameters, such as the rate of growth of productivity and population. Such a soft landing has been the dream of economists for 40 years. In the 1960s and 1970s, when Washington was invaded by a team of ambitious and arrogant economists Under Presidents Kennedy, Johnson, Nixon, Ford and Carter, it was believed that fine-tuning of the American economy would make the achievement of a soft landing from economic recovery to long-term growth a rather easy matter.

6:47Experience has shown that fine-tuning assumes a degree of knowledge and a degree of skill that is far beyond the present capabilities of the economics profession. Tinkering made things far worse than they need have been. The arrogance of economists far exceeds their understanding and their ability to forecast with any accuracy at all. Let's be quite clear at this. At this very moment, at the end of October 1984, there is a debate beginning to develop about the appropriate stance of Federal Reserve policy. It appears that the Federal Reserve has frozen the money stock for the last five months and this money freeze has precipitated a weakness in the economy and a weakness in credit demand that has in turn been reflected in a collapse of short-term interest rates and an important bond rally.

7:48Soon, I believe, the Federal Reserve will be pressed to expand the money supply vigorously in order to avoid a recession in 1985. Meanwhile, many influential economists, friends of mine, have been warning the Federal Reserve to contain money growth in order to ward off an approaching inflation. These people, including Milton Friedman and the eminent economists on the Shadow Open Market Committee, predicted an inflation this year that has not happened. They predicted a recession this year that has not happened. The last year has been a graveyard of reputations among economists. This should be a warning to us.

8:33Economists have been far too willing to tell the country what to do when their own knowledge and forecasting skills are abysmally deficient. But the arrogance of economists was not the only deterrent to the United States achieving In the last 15 years, an attempt has been made to transform the United States into a socialist economy. This has gone under the name of the Great Society.

9:18The Great Society programs were initiated by Presidents Kennedy and Johnson, but they were put into full effect by President Nixon and Arthur Burns, who as Chairman of the Federal Reserve from 1970 to 1978 financed a fantastic inflation. The result was that between 1967 and 1983 consumer prices trebled, the worst inflationary Between 1960 and 1981, the number of dependent Americans, partly or wholly supported by government handouts, rose from 20 million to over 100 million.

10:07In addition to more than 36 million Americans receiving Social Security, there were 19,788,000 8,287,000 households receiving Medicare, 8,287,000 households receiving Medicaid, 6,769,000 households receiving food stamps, 5,532,000 households receiving school lunches, 2,777,000 households receiving public housing benefits. In addition, there were 4,019,000 recipients of supplement mental security income, and a further 10,335,000 recipients of aids to families with dependent children.

10:57In 1965, Federal Government social welfare expenditures amounted to 5.7% of gross national product and 32.6% of total Federal outlays. By 1979, these government's social welfare expenses had ballooned to 11.4% of GNP, twice the share, and to over 55% of federal government outlays. To finance this radical shift in the allocation of the nation's spending, a huge inflation was generated by the use of Federal Reserve credit. A massive confiscation of wealth occurred between 1965 and 1981. The real value of municipal bonds fell 85% and the real value of the Dow Jones Industrial Average of common stocks fell a stunning 61%.

11:54The operation of the economy was further stunted by the massive controls over prices and labour conditions that was part of the legacy of the New Deal. The interest rates were controlled. For long periods the external value of the dollar was controlled by the intervention of the Federal Reserve. Banks were subject to extreme geographical restraints and were forbidden to enter a whole range of financial services businesses. Capacity was controlled in key industries such as communications, trucking, airlines and shipping. The whole of the farm sector was subject to qualitative controls on output and hence on prices. During the 1970s, the American economy was in a straight jacket that was laced up tight during the 1930s. Into this restricted economic corpus, a powerful blast of inflationary hot air was propelled by the Great Society programs, whose most important enforcers were Richard Nixon and Arthur Burns, traitors to their cause.

12:52Cours. In the 15 years to 1980 a program of wealth confiscation by inflation was implemented. The result was to pose the most serious threat to the wealth of the working middle classes and ultimately to the viability of the whole economy. By 1980 there was widespread discussion of the decline of America and the failure of The Climax of the Attempt to Impose a Socialist Revolution in the United States came in 1979 and 1980. In 1979, consumer prices rose 13% and in 1980 they rose 12%. A financial collapse was in the making. Yet, four years later, we can think of the possibility of America are moving at last into a phase of non-inflationary economic growth, something we have been seeking since the beginning of our economic history.

13:55At the end of 1980 federal funds were 19%, today they are 9%. In 1984 for the third year in a row the rise in consumer prices will be likely under 4%. In the six quarters ending the second quarter this year, Real GNP rose $150 billion a year in terms of 1972 prices. This 18-month increase in Real GNP was more than the entire increase in the five years between 1977 and 1982. Who or what was responsible for this astounding transformation? was not due to the Federal Reserve.

14:43The economic transformation of America in the last four years owes virtually nothing to the Federal Reserve, the supreme economic policy body in this country. The annual growth rate of money, M1, since 1977 through 1984 has been, I'll read these 8.1%, 8.2%, 7.2%, 6.6%, 6.5%, 8.7%, 9.3%, 6.9%. The outstanding characteristic of the growth path of money, M1, the story is virtually the same for M2 or M3 or total debt, is that year after year there have been only very minor changes in the average rate of growth of money over this period of eight years.

15:33The Federal Reserve has certainly not been a significant force in smashing inflation. Rather, it has carried on in its own self-indulgent fashion, contributing nothing to any rectification of the financial chaos it has perpetrated over the last 17 years. Nor has Congress made any contribution. Socialists and other advocates of economic planning who do not like to be called socialists will have us believe that politicians are the best people to manage our economy, yet Congress has made no contribution to solving the financial crisis of 1980. We may measure the inflationary zeal of Congress by reference to the federal budget deficit and the federal debt.

16:21In the years of rampant inflation from 1976 through 1980, the total federal budget deficit on a national income account basis was 206 billion. In the years of declining inflation from 1981 to 1984, the federal budget deficits total 573 billion. It's laughable to suggest, as some economists still do, that fiscal policy can be used as any part of an armory of fine-tuning this economy. Fiscal policy is a lumbering elephant smashing the nation's intricate economic machine. And the elephant driver, The Mahut is a rabble of political monkeys, each seeking some nasty little advantage for himself while the elephant crashes and staggers along, breaking and bending any workable item in its path.

17:16Neither the Central Bank nor Congress contributed a whit to the transformation of the American economy. The Congress made things much worse. The Federal Reserve is about normally bad. Several important reforms hold the key to the understanding of America's outstanding success in the last four years. All these reforms have led to a great increase in the influence of free markets. First, the invention of the money market mutual funds in 1979 and their explosive growth Growth, smashed the power of the Federal Reserve to control interest rates. The Federal Reserve detested the money market mutual funds.

18:03As anyone who has read the ravings of Anthony Solomon, the former governor of New York Fed, will readily grasp, the Fed wanted to force the money market funds to hold reserves and to come under the Fed's control. This did not happen, largely because the politicians who would have had to support such an extension of the Fed's already excessive powers, knew that the ordinary American with savings to invest was sick of being robbed by the inflation generated by the Federal Reserve. With the explosion of the money market mutual funds, the banks demanded and got freedom to raise the rates they offered on money. By May 1984, their answer to the money market mutual funds, the money market deposit account, had ballooned to $395 billion, twice the amount then invested in money market mutual funds of all kinds.

19:03These fundamental changes in money administration meant a major elevation of the whole structure of interest rates and a radical change in the return Americans could earn on their savings. To give an example, in 1979, Prime's six-months commercial paper paid 10.91%. In that year, inflation was over 13%, so the net return to the lender after inflation was about minus 2%. By June 1984, that paper was paying about 11.1%, a little different from the nominal The story was repeated across the whole spectrum of American money.

19:48High real rates of interest were and are the order of the day. The bad old days of the rape of savers' wealth through inflation and interest rates, and the rise in interest rates in the United States,

20:08Some days of the rape of savers' wealth through inflation and interest rate controls have largely gone, but let us be clear of this, they did not disappear because of some selfless act by the Federal Reserve. On the contrary, the Federal Reserve fought tooth and nail against freedom for American savers right down the line, but the Fed bureaucrats were defeated by ingenious American financiers The effective deregulation of interest rates after 1980 was pervasive. It changed radically the relationship between saving and spending by adding some balance in favour of savings, a balance that had been lacking during the 1970s great inflation when savings seemed not only foolish but downright irresponsible.

21:05In the financial markets, there was a fundamental change, which I have called the revolt of the financial markets. As things worked out, the financial markets, particularly the crucial bond markets, were free to express their deep-seated suspicion of the Federal Reserve. As soon as it seemed that the Federal Reserve was excessively increasing the supply of money, The bond market sold bonds, thus raising bond yields. Two very important occasions on which this occurred were the end of the 1983 bond rally in May 1983 and the big bond decline in the first half of 1984. On both occasions the bond markets cut bond prices and raised yields in response to fears of Excessive Money Growth and Excessively Exuberant Economic Growth, The Free Dollar.

22:09Upon gaining power in early 1981, one of the first acts of Beryl Sprinkle, Under-Secretary for Monetary Affairs in the US Treasury, was to make it entirely plain to the Fed officials The days of official intervention in the foreign exchange markets were over. Beryl had a little table in his office in the Treasury and a phone on it. And I said, well, you know, I had to work out Beryl. And he said, well, when we came here, New York Fed used to ring up every morning and say, what he wants to do today, Mr. Rear Sprinkle, and I'd say nothing. In one stroke, a huge new area of freedom was opened up. Imports and exports were deregulated, and the dollar continued its booming appreciation. This appreciation provided a most powerful and the World Disinflationary Force. Imports have flooded into America and so has the foreign capital needed to finance those imports.

23:21A major new area of competition for a domestic American industry evolved. Long way to go. Still got a long way to go. Free oil markets. In one of his most significant strokes for freedom, President Reagan deregulated the American oil industry. This has been one of the most spectacular success stories, showing how free markets will soon rectify seeming shortages and turn them into gluts. I've only written a very short paragraph about that because I feel that as I'm in Houston I should perhaps word black on that. The real price of oil has fallen by about one quarter since 1980. I'll now scurry on to the next subject. The weakness of American unions played a very important part in the successful combination of strongly rising prosperity and low inflation.

24:20By now, American unions probably command the loyalty of less than 20% of the American labour force. Further major reduction in the power of unions has come with the spread of deregulation. In the past, to take one example, American airline pilots were the envy of the world. They flew very few hours for very big money. In fact, I remember talking to many Australian pilots and American pilots used to get $100,000 a year in about 1970 for flying 20 hours a month. The Australian pilots used to get $30,000 a year for flying 50 hours a month and they The deregulation of the airline industry meant that old line airlines with highly paid pilots could not compete with the new intruders.

25:14As deregulation has spread, it has contributed to breaking down the power of unions. This goes for trucking, for airlines, for communications, for coal. Import competition has helped break down union power. The UAW is only able to hope to maintain its present extravagant wage scales because of the indefensible quotas on the import of Japanese and other foreign cars. America is the envy of the advanced industrialized world, nevertheless, with their flexible labor force. It's certainly the envy of Europe. Another very important reform was the decline in the influence of economists. Another important institutional change has been the discrediting of the economics profession.

26:04This is a great step forward, as economists have sought power in government and have largely abused that power. Back in the 1950s and 1960s, economists were rising to great influence. Now it is clear that the study of economics has an extremely fragile basis of verifiable theory, and a poor to abysmal ability to forecast. These drawbacks of economics were not completely known in the 1950s and 1960s, except by very few economists such as Friedrich von Hayek and Ludwig von Mises, who were ridiculed by the Keynesian economists of the day. Today however, a couple of decades of abysmal forecasting and arrogant policy making of almost totally discredited economics as a model for analyzing cyclical movements in modern economies and for making policy recommendations, it's a joke, economics is a joke.

27:21Economics has been used in the last 20 years as a basis for arguments in favour of the ever expanding state control over the economic life of the nation. An Australian economist Jack Crawford once said, of economists I would say, our standing is too high and our standards are too low. And I think in the last six months, the crash of reputations on Wall Street has been very, very loud and I think it's probably indicative of the status that economists have reached that a clown like Henry Kauffman can continually get up and make various, what shall I say, utterly inaccurate statements and keep on being able to do it.

28:21Names like Walter Heller, Otto Eckstein, Herb Stein, Arthur Oaken, James Tobin, Gardner Anna Ackley, Paul Volker and Arthur Burns will go down in infamy. They were among the many economists who used their skill and knowledge to help destroy freedom in America. They thought they could run the American economy from Washington. We now know that the ability of economists to forecast is so limited as to be laughable, and accordingly the pretension of economists to manage the American economy are ridiculous.

29:11Under the Reagan administration, the last major holdout of economists with the pretensions to manipulate the economy and the power to use it is in the Federal Reserve. That is why it is so important to abolish the central bank, which is a canker on the nation's healthy body. And I must admit, although I am a very great admirer of the President, I think that his failure to deal with the Fed is one of his most important mistakes. With the departure of Martin Felstein, President Reagan does not have a senior economic policy The Council of Economic Advisers has degenerated into a redundancy.

30:04The pretensions of economists to hold sway over major policy issues has been squelched. The means that have been used to smash inflation and to provide a possible soft landing onto The recent evidence of the stunning success that American capitalism can achieve when allowed to do so does not mean that the enemies of freedom have been firmly defeated or even The New Deal is dead, that is true. It has outlived any usefulness it may have had. The free operation of markets has proved to be a marvellous stimulant to economic success.

31:06But the Federal Reserve bureaucracy remains as large and as pervasive as ever. There is not a tittle of evidence that Federal Reserve policies have changed. Money growth is excessive May I give you a specific example of the power held by the Fed? On September 22, we were told that Mr Gerald Corrigan, a Fed official from Minnesota, had been appointed to the position of Governor of the New York Fed. This appointment means that the self-perpetuating oligarchy of the Federal Reserve bureaucracy has had its way again. Mr Corrigan, a protege of Paul Volcker, has been appointed to the second most important position in the Federal Reserve on the say-so of Volcker. Volcker is Mr. Corrigan is just another Fed flunky. He deplores budget deficits. He disbelieves in monetarism.

32:23He's the very epitome of a central banking bureaucrat who is anxious to offload responsibility for mistakes and disasters onto fiscal policy and always determined to avoid means whereby arrogant bureaucracy can be judged. Mr. Corrigan sounds like someone who has never advanced in his learning beyond the slogans about the Burns, the great destroyer of America's money. Burns fought tooth and nail against congressional interference in the doings of the Fed. When, in 1975, the Congress imposed rules and targets on the Fed, the Fed officials lied and cheated their way out of compliance, changing base periods and changing definitions so that they would not have to obey the laws of the United States.

33:23Mr Corrigan's predecessor at the New York Fed, Mr Anthony Solomon, led a campaign against The Money Market Mutual Funds, arguing that they should be subject to reserve requirements. In his 1982 speech to the New York State Bankers Association, Solomon said, The money funds have introduced potential new complications for monetary control. Any bureaucrat, a potential complication means something they can't stamp on a control and lock down to the floor. In my view, said Solomon, these concerns require a legislative response. Part of the response is to expand the reach of regulatory instruments, wacko. Faced with the threat to their power from the unregulated money market mutual funds, Solomon and the Fed officials demanded still more power regulation for the central bank.

34:15Earlier, faced with the threat to their power from unregulated cash management accounts, Accounts, Solomon said in the 1981 annual report of the New York Fed, In this new world, the bulk of transaction balances will be paying market-related rates. That was under the Cash Management Account Scheme. Thus, all meaningful definitions of money might exhibit the kinds of control problems that the broad definitions are already beginning to show. One possible means of remedying such a situation would be to develop legislation, Defining a transaction is able to, very broadly, perhaps to include all instruments payable at par within a few business days, and then to impose reserve requirements on judge instruments.

35:02Here again we see the characteristic response of these Fed officials. If it gives you trouble, control it. If it had been left to the likes of Solomon, undoubtedly speaking, with Volcker's authority, the money market funds, the cash management accounts, and many other of the new financial instruments would have fallen under the control of the Fed and would have been killed. There would have been interest rate controls, just as there were from the time of the New Deal until 1981, when the money market mutual funds broke the Fed's control. That control over interest rates was a fundamental factor leading to confiscation of wealth in the 1970s, As interest rates were held down by the Fed while they pumped up unprecedented inflation and robbed the American people of their wealth.

35:53What I ask is, why must we allow these unelected officials, responsible to no one but themselves, have the power of life and death over the money of America? Why do we need these people at all? They are nothing more than bureaucrats, jacks in office, who have gained the power to control our money. They have no special insights. Their theoretical knowledge is just as lacking in value as is all knowledge derived from that most fallible of the social sciences, economics. They are free to do favours to their clients, the big New York banks. They have defied Congress and they have cheated and lied to Congress. I've been astounded at the glutinous reception Mr Corrigan has received in the media.

36:43He is only yet another official whose natural instinct has expanded his power and his prestige and that means at our expense. We should clean house and get rid of the whole lot of these Fed bureaucrats sitting in their paneled halls issuing their diktats. Congress is still dominated by the disciples of the New Deal. The Tip O'Neill House of Representatives is as dedicated as ever to state socialism. Even inside the Reagan administration there is a powerful contingent of officials, James Baker, Vice President Bush and Senator Dole, who favour swinging tax increases. The Chairman of the Council of Economic Advisers, Martin Felstein, was a powerful advocate of of Higher Taxation, working for the Republican President.

37:40He was as much a pessimist about the potential productivity of free market capitalism as anyone. You don't find out about freedom sitting up in some Harvard office, cross-eyed students looking at you. I recall a tense argument I had with Felstein at the offices of the New York Post in late 1982, when he was trying to tell me that there was going to be a slow and grudging recovery in 1983. It was a ridiculous notion, I said, it's ridiculous, I said, it is ridiculous, the rate of growth between the fourth quarter of 1982 and 1983 would be 6%, you're saying it's 3%, and by The enemies of freedom and economic success dominate the International Monetary Fund and the World Bank, these places are repositories of all the failed officials from the treasuries around the world.

38:50The enemies of freedom have then persuaded a business round table, one of America's top corporate clubs, that higher taxation is the only answer. I had a sit there with that McGillicuddy, head of the manufacturers, I never trust about that, he got very nasty, I said you're nothing but a socialist. The so-called responsible media in this country, the New York Times, the Washington Post, the Boston Globe, the TV networks, are deeply weathered to state socialism and the welfare state, and you are reading that every day of your lives. These people seem to have some desire to destroy this country.

39:40Just because freedom has proved such a success in the past four years, there is no reason to believe that the powerful political and bureaucratic cliques have accepted the idea that the New Deal is dead and should remain interred.

40:16It's refreshing and indeed it is heartening to hear somebody with the insights and the The Courage to Say the Things that Need to be Said in Our Journalistic Profession that Maxwell Newton does, and Maxwell, I applaud you for it. I think if Maxwell had a message to deliver to us here, it was that in spite of massive government intervention, control, intrusion into our lives, especially in the areas of money, that we with an entrepreneurial spirit and an ability to see ahead can overcome at and at least partially some of these controls that have been placed on our lives. The money market deposit accounts and mutual funds that Maxwell mentioned, which have erupted in our financial sector in recent years, are only one such example.

41:05But Maxwell having said that, I can't, I think, let you go and make your highly accurate remarks about my profession without at least a little bit of a rejoinder. I'll readily admit I don't disagree with much of what Maxwell said about the economics profession. Grudgingly I will admit there is much we cannot do. There is one thing we can do. We as economists can, by and large I think Maxwell would agree, we do respond to incentives. Consider the following, Otto Eckstein, who Maxwell mentioned, and was one of the architects of the Socialist Economics of the Johnson Administration, died about a year and a half ago, leaving in a state in excess of $100 million.

41:54Henry Kaufman, who Maxwell mentioned, one of Wall Street's best-known socialists, makes in the neighborhood of $3 million a year as a managing director with Salomon Brothers. Martin Feldstein, when he was being hearings for his appointment to the Council of Economic advisors did reveal he had a salary in excess of a million a year. So maybe we don't do much good on that but we do line our pockets or some of us do. Let's have some questions please. I'd just like to say that always that confirms the well-known theory bullshit baffles brains.

42:41I've never believed the theory that Volcker would quit after the election, mainly because the theory is often expressed in terms of, oh, he's only getting $60,000 a year and he only has an apartment in Manhattan and so on and so forth and he can get half a million a year or a million a year, something with a chase. I don't think amounts of money like that motivate people who have got jobs that are that influential. I think that Volcker is a man who loves being the most powerful economic official in the world, and I can't see him wanting to give that up for any job in a private bank even if it paid $2 million a year.

43:32And that's one part of the answer. The other part is that I think he has succeeded in bringing interest rates down very handsomely in time for the election and thus ingratiating himself with the President. I don't think he would necessarily have been trying so hard if he'd meant to quit after Christmas. Let me add an addendum. As Maxwell mentioned earlier, Jerry Corrigan has been named President-elect of the New York Federal Reserve and he is a Volcker protégé, so in the event that Volcker does step down I remember seeing some image reports in the last few months about the Legislature. Congress had not passed a legislation stripping non-banked banks. They were happy that the deregulation continued. I'm not sure what all that meant, but it sounded like there was...

44:30No, I think the Congress is actually moving to restrict that, those non-banked banks, and also to halt the process of banking deregulation. And the excuse that will be used is that under this deregulation, you know, a few banks have gone broke. And so we can't afford to sort of leave these free markets to, you know, operate on their own, it's too dangerous, people actually lose money. Money, which is the object of all free markets, of course, but that will be the excuse. And what I'm very concerned about is that that campaign will gather enough momentum that they will be able to re-institute interest rate controls or put controls on some of these new instrumentalities which would lay the foundations for another big inflationary burst.

45:27Once they've put a ceiling on rates, then we're back to the bad old days.

45:49Then if Balko really wanted to make money, he could short the bond market any day that he liked.

45:57Well, I suppose he doesn't want to make money. Maybe he already has made it. We don't know about it. We don't get to. Well, the last ones to hear. He may own, basically. Yeah. Well, that's a good point. Effectively, he has some ownership, given his vast powers at the Federal Reserve. What he does clearly has an effect on all of the major banks. So maybe not in an equity sense he owns them, but certainly in a power sense. You referred to the Federal Reserve Board officials in your remarks as the unelected officials. I wondered if you thought that it would be better if they were elected. I wondered if you see in the land a growing feeling among the electors to put somebody in charge and have them be responsible for the people.

46:52Well, my priorities are, number one, abolish the Fed, number two, put it under the control of the Secretary of the Treasury, and then you at least have a political head who would be at least answerable to the normal political process that every other part of economic The idea that the Fed should be independent is a nice notion invented by bankers and officials so that they can do what they want to do.

47:38The idea is that money and confidence are so fragile and delicate matters that they couldn't can possibly be left in the hands of any body associated with politics or subject to the pressures of the unwashed masses. Just leave it to us and everything will be okay, which is the argument of every dictator and every oligarch through history. Well, that's what these people have got, a cozy little set up. They've got the New York bankers, the New York government securities dealers, and a Fed official apparatus.

48:26And they can do what they like. They don't tell you what they do when it's relevant. They tell you weeks later. They don't explain what they're doing. They're even incapable of measuring what they're doing. We found out in February this year that all the money numbers for the last half of 1983 were wrong. The whole bloody lot were wrong. I'd been going around the place saying there's going to be a recession, there's going to be a recession, Milton Friedman standing up, making speeches, Carl Brummer rang me up before Christmas 1983 and said, Marx, Marx, the Fed are going to get Mondale elected, they're going to have a recession in 1984, and they're going to be Mondale, it's going to be elected.

49:11Well, it turned out that all the numbers were wrong. That's all. So how could they possibly have been able to do anything? They were running with the same wrong numbers that all the rest of us were. It was a farce. But they persist with this notion that, you know, leave it to us and everything will be okay. Leave it to us and everything will be okay for us. These people should be made to get into the grubby business of politics like all the rest of us, instead of sitting in their marvelled halls. My question is predicated on the re-election of Ronald Reagan. Did you see a continuation of the deregulation plan under another four years of Reagan?

50:06No, I don't. No, I don't. I think the forces opposed to deregulation are regrouping and I think that, I mean, deregulation only occurred, it occurred because nobody was really noticing what was going on. That fellow Alfred Kahn got in there and deregulated the airlines without anybody really noticing. There's a big court case involving AT&T, that sort of went on and suddenly it was all over and it was decided. A few other ones like trucks, railways and so on, and then Beryl just got in there and Reagan obviously said well it's okay to let the dollar float and Beryl said no, so.

50:56But then in banking the deregulation happened because you had these two geniuses who formed the reserve fund in New York and it got away from the Fed. But once it's structured on the basis of as a matter of policy are we going to have deregulation? As a related question, I was happy to hear you say that the economists have been discredited, more or less, in logic, among the groups of economists trying to influence Reagan, that's right, Chandra, Keynesians, applied-siders, conservative opportunity people, whatever. Which do you see coming to power, winning out in the next four years?

51:49The Dallas Convention was by the low tax people, which was really Jude Wienyski and Alan Reynolds who he wrote about. Apart from that, there really aren't any. In the Treasury, you've got Beryl, who spends most of his time on LDC debts, Manuel Johnson, Yes, you're right. What you said about them is quite right, that they've got no real There is a lot of speculation about to what extent the Fed will support the member banks in case of collapse.

52:58Recently the Fed commented that they would support the top 11 banks. I'm not quite sure what that meant and I would really appreciate your expansion on that subject. I didn't read that. I'll interject. I think what it means in part is the Federal Reserve, in cooperation with the FDIC and the Comptroller, bailing out continental Illinois, sent a signal that it will not allow any large bank to fail. It just will not allow that to happen. Now think of the inequities. We have increasing bank failures among small banks in the United States, but just because a bank is so-called large, large, and that's what they meant by the top 11, Federal Reserve will not allow it to fail.

53:46That's a tremendous subsidy out of you're in my pockets as taxpayers to the officials, the workers, the stockholders of these major money center banks. You support Reagan and his program. If he gets elected, which I think he will, where is he going to go with the deficits? Eventually these deficits have to do something. They've got to bury the country. You can't go on with it. Is it, as you said, that it's going to happen, that they're going to evaporate? No, they're not going to evaporate, but I think they'll just ignore them.

54:33I don't think they'll, they might put some, maybe some mild tax increase through it, and try and hold, I think what they'll likely try to do is hold the line on non-government, non-defense expenditure, keep on increasing defense spending and look the other way. No I think the harmful thing is the growth of government spending and I just don't know I don't know how you control that. I do not know how that can be done.

55:18I think that is the one reason why ultimately America may go the same way as Europe's gone. And I just don't think the American political system or any democratic political system seems to be able to withstand the constant pressure from sexual interests for improvement in their position. But I think that one thing that could blow up very soon, and which I think is a big headache coming up on the left, is that if this country were to experience very slow growth in 1985, or zero growth, there could be a fall in the dollar as a result.

56:08And that could be accompanied by a tighter Fed policy to try to hold the line and a further reduction in economic growth and a sort of unwinding of the United States economic success into the sort of failures that they have had in Europe. Because the Europeans are being drained of their capital when it's coming to this country Because the capitalists there can't see any point in investing in countries that don't seem to be going anywhere. They've got very high taxes. It's quite possible that we, who have been in the virtuous cycle, increasing capital inflow, a strong dollar, strong economic growth, disinflation, we could turn around and go into a phase of slower economic growth, declining capital inflow, a falling dollar, a tighter money, the other way around.

57:13One of the reasons for that would happen is a miscalculation by the Federal Reserve, which is very much on the cards. It seems to me that we may be giving a little too much credit to these premiums to account for these remarkable changes since the 70s. I would suspect that possibly part of that may be a relative weakness or insecurity, political and otherwise, in Europe and Asia, which has led to this enormous flow of assets into the country. Don't you think that the perception could change, as you think you're suggesting right now, from back in the 70s, or something very much like that?

58:22Well, I think that is quite on the cards. The present happy state of affairs does rest on a whole lot of variables like the capital inflow. Well, thank you very much, Maxwell, for those two.