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Why do governments create inflation?

They create inflation in order to get the revenue from it, and the reason it has

come down is not because governments have become more noble but because

you can’t get much revenue out of it. I gave a talk at the Bank of Japan in

1985, on which I based the last chapter of my book Money Mischief [1992]. I

entitled it ‘Monetary policy in a fiat world’. To quote, ‘inflation has become

less attractive as a political option. Given that the voting public is very

sensitive to inflation it may currently be politically profitable to establish

monetary arrangements that will make the present irredeemable paper standard

an exception to Fisher’s generalization’. In Fisher’s Purchasing Power of

Money [1911] he says that every attempt at a paper money standard has been

a disaster. How do governments get money from inflation? Number one, there

is the direct value of the high-powered money base. That’s a very small

source, it’s trivial. Much more important are two other sources. One is that if

your tax system is expressed in nominal terms, inflation raises taxes without

anyone having to vote for higher taxes. The second is that if you have been

able to issue securities at an interest rate that is lower than the rate of

inflation, you can expropriate those securities. The expropriation of past debt

plus the automatic increases in taxes were undoubtedly the major source of

revenue for the USA from the inflations of the 1970s. There is no doubt about

that. I remember having breakfast on some occasion with the then Senator

Long from Louisiana who was on the Finance Committee. He said, you know

we never could have passed these rates of tax on current incomes if it hadn’t

been that they were automatically brought up there by inflation. It would

have been politically impossible. The adjustment of tax rates for inflation,

indexing the tax rates, has eliminated one source of revenue. The fact that

bond markets have become so much more sensitive to inflation has elimiMilton

Friedman 217

nated the second. So how much revenue can you now get out of inflation? It

isn’t worth inflating. If you have inflation in the future, my prediction is that

it will only be as an attempt for full employment purposes and not as a way to

raise revenue. That’s why I’m pretty confident that there will not be a major

inflation in the future.

Do you think that disinflation can ever be achieved without significant real

output/employment costs?

I doubt it very much. That’s why you don’t want to let inflation get started –

because it’s so hard to bring it down.

Personal Information

What importance do you personally attach to being awarded the Nobel Prize

in Economics?

Obviously it is extremely rewarding. However, when I first learned of the

award from a reporter in a parking lot in Detroit who stuck a microphone in

my face and asked, ‘Do you regard this as the high point of your career?’, I

answered, ‘I care more what my successors fifty years from now will think

about my professional work than I do about the judgement of seven people

from Sweden who happen to be serving on the Nobel Committee.’ I do not

mean to denigrate the Nobel Committee. They have been doing a very conscientious

and good job on the whole, but at the same time what really

matters to a scientist is the long-run effect of his work on his science.

The number of books and refereed articles you have had published is prodigious.

I don’t know what it is. It is very large, yes.

How have you found the time to write so much and has this impinged on your

family and social life?

[Laughter] No. For much of our married life and the first part when we were

at Chicago in particular, we typically spent three solid months in the country

at our second home in New Hampshire to begin with and later on in Vermont.

Then later on I split my life 50–50: we spent six months a year in Chicago

and six months a year in Vermont. Almost all of my writing was done in

Vermont or in New Hampshire, relatively little during the actual school year.

I managed pretty much to keep down outside activities. I didn’t go away from

Vermont or New Hampshire to make speeches or to address committee meetings

or hearings. There were occasional exceptions but for the most part I

made it an absolute rule. When I look at my remaining diaries from that

period I am shocked by how full the pages are when I am in Chicago and how

empty they are when I’m up in Vermont or New Hampshire [laughter]. So

that’s the only reason I was able to write as much as I did.

Do you find it ironic that many of your views, once the subject of intense

debate and controversy, are now firmly embedded as part of the established

mainstream orthodoxy in macroeconomics?

I find it very satisfying but not ironic at all. Why should it be ironic? New

ideas have to fight a battle to get accepted. If you are against the conventional

wisdom, the course of reaction from your critics is very simple. The first

reaction is that it’s all a bunch of nonsense, it’s just so extreme it can’t

possibly be right. The second reaction is, well, you know, there is something

to it. The third reaction is it gets embedded in the theory and nobody talks

about it any more.

Don’t you need to be thick skinned and have great strength of conviction in

your views in such circumstances?

I don’t think the question is one of having a thick skin. I think the question is

one of belief in what you are doing. Conviction is strong. I have never been

bothered by intellectual attacks; that hasn’t been a problem. I’ve always had

very good personal relations with people whose views are different from

mine. With very very rare exceptions, I never had any personal problems.

Paul Samuelson and I, for example, are good personal friends.

Have you any as yet unfulfilled academic ambitions?

No I don’t think so. My main ambition now is to get our memoirs finished.

We’ve been working on them too long. Over the last year and a half I’ve had

health problems which have slowed down our progress on our memoirs.

One final question. John Burton [1981] has described you as the Adam Smith

of the twentieth century. Is that a description you would be happy to have?

[Laughter.] Sure, I’d be happy to have that. Adam Smith was the great father

of modern economics, there’s no question. I’d regard it as a great compliment

to be regarded in that way. But I believe that view is based not on my

scientific work but on my outside activities propagandizing for free markets.