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George Shultz on Milton Friedman

George Shultz gave a speech at the University of Chicago's belated celebration of Milton Friedman's 90th birthday. It was delivered on Thursday, November 7, 2002 at a "private" dinner with about 100 people in attendance.

Abstract of George Shultz's Speech:

SYLER: George, who as Milton said, has a true genius for keeping a conversation among prima donnas on track – good training as a dean at the University of Chicago. George, of whom Milton said, I have long thought that he would have made a splendid president, if a non-career politician could conceivably get the nomination. Our colleague and the 60th Secretary of State of the United States, George P. Schultz.


SHULTZ: Thank you. Rose, Milton, friends of Rose and Milton. I have spoken around the world quite a bit, and I frequently get asked in the Q&A part of that—people will say, well, you’ve dealt with presidents and prime ministers and kings and so on over a long period of time, and who has made the greatest difference? And so I ruminate about Gorbachev and one person or another, and of course, in the end, come around to Ronald Reagan and Margaret Thatcher. And I get through talking about them, and then I say, well, all things considered, I have to say Milton Friedman. And I think you all know and you could give the reasons why you would say, all things considered, when it comes to really making a difference, it would be Milton. And I suspect that Ronald Reagan and Margaret Thatcher might give you the same answer because they have been powerfully influenced by his ideas.

I don’t—and I know you could all, in this room, all the people in this room could review the reasons for making a statement like that. So I’m not going to try to do that, but rather, particularly in the spirit of my two predecessors here, just talk about some personal experiences—ways in which Milton had a direct impact on me and what I did and helped in innumerable ways in bringing things about.

As you mentioned in one of your introductions, I did not get a PhD from the University of Chicago. But there is a sense in which anybody who comes to the University of Chicago, in whatever capacity, winds up being educated, and you think of your education and this is where you think it came from. And particularly when you come here, the influence of Milton, at least when I was here, and I suspect it’s still true, is pervasive. And I had the privilege in my time here, particularly when I was dean, of having right across the hall from me the office of George Stigler, and so I got to know Milton directly, but I got to know Milton a lot because I played golf with George and saw a lot of George, and most of what George talked about was Milton. So I learned a lot. But to me, to a certain extent, I put them in a kind of a bracket.

So let me talk about some of my experiences. The first one that is very vivid in my mind and my experience had nothing whatever to do with economics. We were in the Vietnam era, and you remember the Dow Chemical Company? It’s a fine chemical company. They made napalm, which the Defense Department wanted. I suppose it’s a perfectly honorable thing in America to run a company that produces something that the Defense Department wants to buy. However, in the Vietnam atmosphere, they were very unpopular on campuses, including the campus of the University of Chicago.

In the Business School, we had then—I suppose they have now—a process. Students want to get jobs when they leave the business school and the way that happens is companies come and they put up something on the bulletin board and students sign up. They want to be interviewed and have that company tell them about themselves. Now, the university takes great pride in all of the kooky people that get invited to speak—communists, Nazis, crazy people—and they’re always talking about how open we are and how free we are and we believe in freedom of speech. And so I said, you know? This is freedom of speech. The students have, in effect, invited this company to come here and tell them about themselves. But there was a tremendous furor, and I would say the faculty as a whole was very much opposed. One of the trustees, who I knew and liked a lot and admired, came to me and he said, look, I will hire the best suite in the Palmer House and I’ll have two limousines with drivers to take students back and forth. Just don’t have them come to the campus. I said, wait a minute. Don’t you believe in freedom of speech at the campus of the University of Chicago? And the fact was that in universities all over this country the answer was no, when it came to something like this.

So it became a gigantic issue on the campus. I see Jim Laurie here. He’ll remember it. And there was at least one and maybe more meetings of the whole faculty at night to discuss this. And of course, I, as dean of the Business School, I made my case, but I couldn’t begin to argue this as Milton did and George did. And I listened to Milton give the logic of it. I could feel the passion as he argued for the virtues of freedom and the necessity for freedom on the campus. I could sense and everybody could sense the steel in his backbone, and you could see that here was something immensely controversial on the campus—didn’t phase Milton at all, he waded right into the controversy.

And in the end, the faculty just had to bow to the logic of it and we had the recruiters come. There was a big demonstration in the court, outside where the business school then was. Hans Morgenthau gave a speech about the terrible things of napalm and Vietnam and so on, but we had the interviews. Freedom of speech prevailed. And I think the University of Chicago stood up pretty well to that terrible, I think, very bad period for universities, and partly it was because of this episode. And the episode turned out well in very considerable part because Milton Friedman was there. He stood up. He was counted. And he argued well and forcefully, as I said, with great logic and with great passion.

I’ll skip along to a time when I was Director of the Budget and I had been around the university for 11 years or so. So I had breathed in all the wisdom, and among other things, I had learned from Milton and others that you got to have some confidence in the marketplace to solve problems. It can do it. It can work, but you got to hang in there. So I became Director of the Budget and I found that there was a company—the Penn Central Company— that was about to fail because it had been badly mismanaged— a big company, financial company. And Arthur Burns, who had been the Chairman of the Council of Economic Advisors when I was on the staff and he—I don’t know how many of you knew Arthur. He was a very powerful personality, let me tell you, as well as being something of an economist. Chairman of the Federal Reserve. And he was very worried about the Penn Central and he was arguing that the Penn Central could not be allowed to fail because it would be terribly upsetting to financial markets and he wasn’t sure they could stand up to it. And a reluctant David Packard had agreed to some sort of Pentagon very large guarantee—over $1 billion guarantee—that was going to bail out the Penn Central. I’m a newly minted Director of the Budget. I’m a lousy labor economist. And I find myself arguing before the President with Arthur Burns, saying, financial markets are stronger than you think, and if you bail out the Penn Central, look at the message you’re sending. It’s all wrong. This is not a good idea.

I don’t think I could have stood up to this if I hadn’t felt somehow there was Milton with me. I just knew. You weren’t there, but I just knew if you were there, Milton, you would be on my side. I don’t know how the President would have come out. I’m almost sure he would have wind up siding with Arthur, but at just the right time a man named Brice Harlow walked in. Brice was probably the most skillful, savvy, Congressional relations political operative ever to hit Washington. And he said, Mr. President, the Penn Central in its infinite wisdom has just hired your own law firm to represent them in this matter. Under the circumstances, you can’t touch this with a 10-foot pole. And so there was no loan guarantee. The Penn Central went bankrupt. And no dominoes fell. The big lesson in letting the market work, and you can apply that lesson to a lot of other experiences that we have all witnessed since that time.

Now let me then come to the subject of exchange rates. As I understand it—I never saw this letter, but I’ve heard about it—in the transition period between when President Nixon was elected and when he was sworn in, Milton wrote a letter and said to him, Mr. President, one of the first things you should do is close the gold window because sooner or later, the marketplace will demolish the system as it exists, and you should get ahead of the game. Am I more or less quoting you correctly, Milton? But the President didn’t take that advice. And again, this was a time when I was the Budget Director. It became clear that there was no alternative to closing the gold window because foreign governments held about three times the amount the value of the gold in Ft. Knox, if you kept the price where it was.

So the gold window was closed and we entered the kind of period that I know Bob Mundell has prayed for all his life—in a flexible moment. It was tremendously—lots of turmoil. Lots of international agitation. It was the first time that Henry Kissinger realized that economics was important because he saw how destabilizing this was. And with a lot of push from him, John Connolly, then worked to produce what was called the Smithsonian Agreement —it was great theatre. And it was the par value system but with different exchange rates. Of course, it was only a matter of weeks before that began to fall apart at the seams. And with all of that tumult, I kept asking the Treasury from my perch as Director of Budget, well, don’t you have some sort of a plan for what you ought to do, and they kept saying, yeah, we got one, but it’s secret. We won’t tell you what it is. So not long thereafter, I became Secretary of the Treasury. So I said, OK, I’m the Secretary. What’s the plan? They said, we don’t have one.


What to do? Here we have the Smithsonian Agreement. The whole thing’s coming apart at the seams. Everybody is in a state. And so of course I talked to Milton, and Milton gave me an idea. Milton said, why don’t you work out a system that is, in effect, a floating exchange rate system in the clothing of a par value system? So it might sell. This is a practical thought. And here’s the way the system would work: Exchange rates would change automatically depending on changes in reserves. So whether that would have actually worked or not, I’m not sure, but at any rate, it became the kernel of a proposal that we developed—and I had Paul Voker as Undersecretary. He was the secretariat for this. Arthur Burns was heavily involved—kind of reluctant about it all.

But at any rate, we finally got up a proposal. I remember taking it to President Nixon, who really didn’t like that kind of stuff. And I said, Mr. President, you’re going to give a speech to the annual meeting of the International Monetary Fund and the World Bank. Here’s your speech. You’ll be proposing this as the U.S. position. And he looked at it and he thought it was all right, but he said, I’m going to go over and I’ll give a speech and I’ll say at the end of my speech that tomorrow my Secretary of the Treasury is going to give you the U.S. plan. So I had the most hyped speech anyone ever could think of, and I basically put forward Milton’s plan. And it brought an international sigh of relief. I don’t know whether you really quite realize how upsetting it is in the world, on any subject, if the U.S. has no position. And when the U.S. takes a position, whether they like it or not, they feel well, all right, we’ve got something to talk about, and that’s the way people felt.

Of course, the plan got beaten around and talked about, but in the meantime, the reality of the situation continued to assert itself. And by March, 1973, in two tumultuous weekends in Paris, we finally agreed on what turned into the present system. And the way it was characterized was it focused on intervention, and you could intervene to maintain what were called orderly markets—nobody tried to define what that was—but the main thing was that you wouldn’t intervene to maintain an exchange rate. And so, finally, that thing worked itself along, but I would say a very key element of it was the thinking of Milton Friedman, and I borrowed heavily on his advice.

I might say that there’re all too many crises in the financial world in recent years that have come about as a result of some sort of artificial so-called soft peg of some kind that only led to a hard landing.

Now, my next example’s not very pleasant to talk about. I try to avoid the subject of wage and price controls, but they accompanied the closing of the gold window. And I argued against it, as you might expect. I had given a speech. We had a situation where inflation was actually declining. It had been around 6% and it was drifting down, and I gave a speech entitled, “Steady as You Go,” saying we had the right policies, but just hang in and keep going. John Connolly came in as Secretary of the Treasury, and John was a doer and wanted to take charge of things. And the spirit of the times was very powerful in favor of controls. I had, back in the mid-’60s, you remember the Council of Economic Advisors had a whole chapter in which they put out a concept of guidelines for wages and prices. And we actually had a conference here at the University of Chicago that Bob Aliber and I put together. Milton spoke at it. And I looked over your article in that book here recently, Milton, and I would say that nothing that went wrong during the wage and price control episode was unpredicted. It’s all— all the problems that happened were known about in advance— totally predictable – including the fact that somehow the monetary authorities would think that with wage and price controls, you had inflation under control and therefore you could have a very accommodative monetary policy, therefore, increasing inflation. It’s right in his article.

So all of these things were there, but I have to say that it’s sobering because the President knew better. All the arguments were made. But I can recall going to a meeting of the Business Council and stating my point of view there, and they did something they’ve never done before, or since: they had a vote. And everybody – all the big business people in America – were all there and they all voted against me. Only two voted on my side. One was Walt Riston , who was then head of Citicorp, and the other was a man named Harper, who was head of Alcoa. But other than that, all of the business community wanted controls, and they thought somehow that they could get controls on wages, but not on prices. I don’t know how they think that, but they did. And so there was a major campaign, and finally it succeeded, and of course it was very popular for a while. That was one of the scariest parts. And very difficult once you start to get loose again.

Maybe we’ve learned the lesson of letting markets work and not having controls, but certainly this episode and others that you can see around you all the time—for example, in California, our then governor, but he was unwilling to let the market work. And of course, it forced this catastrophe, but yet, there it is. And so I say that the struggle to keep these lessons learned will never end and you just have to keep working at it.

One more experience. When I became Secretary of the Treasury, I found myself all of a sudden involved in issuing Treasury securities, and I said, gee, this is a big deal, here. When I sell billions of dollars, it’s fun. And then I got involved in the process. What was the process? Well, there were some 15 or 20 major bond trading houses represented. They came to the Treasury for a day and a half and they went over to the Fed and we told them what we thought about the economy and they said what they thought and what the condition of financial markets were, and they gave their advice about what the coupon should be and what the maturity should be and so on. And then they went away sworn to secrecy, and a day later, we would, in our consultations, put our proposal out. And the way that auction was run, you bid and you paid whatever you bid, and so you went down the list of bids until you got the volume you wanted and that was where you stopped, and everybody paid what they bid. And so if you bid too high, you paid more than the market-clearing price, and that was the system. And somehow, there was just something wrong with that system, I thought. I really didn’t quite understand it, but I was not comfortable with it.

And along comes Milton, and he says, why don’t you try the Dutch auction? And never mind all this consultation, just make up your mind and let people bid whatever they want to bid, and the market clearing price is the price, and then everybody gets the issue at that price. And the people—the old-timers in Treasury said, that’s terrible. You’re leaving a lot of money on the table. And we argued on the contrary. If—the system means that nobody that isn’t in that little club dares to bid. And so if we do it this way, we’ll get more bidders, and so we’ll get better prices. Anyway, we did it. And it worked. And there was a Treasury study that was suppressed for a while, but at any rate, it showed that the system worked.

Now, my successor, a wonderful man named Bill Simon (sp?), the late Bill Simon, of course was a Solomon Brothers bond trader before he came to the Treasury. And he was not in office a day before he went back to the old system, which he liked. And after he left office, but not too long after, we had the scandals involving Solomon Brothers rigging the market, and it was a huge problem. And I would have to say that if the Dutch auction system had maintained itself in place, we would not have had that scandal. Solomon Brothers, to my mind, has never recovered from that. And as you look out today at all of the problems of investment banking firms allocating IPOs to the people that they did major business with, you have to say to yourself, why not a Dutch auction for IPOs? It’ll solve that problem. So once again, Milton’s recommendations turned out to be very practical and useful and helpful to me.

I learned what it’s like to feel like Milton when a few years ago I said I thought the "War on Drugs" was a terrible—wasn’t working right and we ought to do something about it—at least, be willing to discuss it, maybe even legalize drugs. And I saw then what happened to Milton because you just hit—I’ve never gotten so much mail. But I would have to say that 99% of it was along the lines of, I’m glad you said that. I agree with you, but I’m afraid to say it because the censure is so severe when you take such a position, but at any rate, I think plugging away at it—and it does make sense—gradually, things change, as is happening in school choice, I believe—I hope—and of course, the volunteer armed force, which brings me to a final story of how, Milton, you helped me with J. Edgar Hoover. You don’t know about this.

But one time, when I was Budget Director, the Budget Examiner for the FBI came to see me and he said, the FBI has made a mistake in its budget. And I said, well, normally any Budget Examiner, if they’d made a—agency you’re examining makes a mistake, you’d go back to the agency and straighten it out. And he said, well, that’s right, but this is the FBI. I said, oh, I see. You want me to do it. Yeah, we thought it would be a good idea. So that afternoon I had an appointment with the President and I told him about this, and he said, well, if you want to take it up with J. Edgar Hoover, help yourself, but if you get in trouble, don’t come to me.


So I thought, well, hell, I have tenure at the University of Chicago. I might as well give it a go. So I wrote to the Director of the FBI and I got a letter back a couple of days later and said, you’re absolutely right. Thank you. Now, what did I write? I can’t remember exactly what I wrote, but I’ll paraphrase it a lot. But it was along these lines. Milton Friedman has finally persuaded the country to adopt a volunteer armed force. In your budget submission you ask for—I’m pulling a number out of the air here—$100 million to chase draft dodgers. But there are no more draft dodgers. So you’ve made a mistake. And he agreed. So, Milton, thank you for saving me, as a taxpayer, all that money, and thank you for all of the other things you’ve done.

I have one final comment and this is lightly methodological. Now, we know Milton’s prowess as an intellect, as a theorist, but we also know and has been brought out by earlier comments, how insistent he is that if you have a theory, you better test it with facts and a theory that can’t be tested better be reformulated so it can be tested. And you’ve got to bring the facts to bear. So I know, Milton, you’re tone deaf, but it isn’t going to bother you. I’m going to sing, but you won’t know it. So here’s my song – my methodological tribute.


A fact without a theory is like a ship without a sail; is like a boat without a rudder; is like a kite without a tail. A fact without a theory is as sad as sad can be, but if there’s one thing worse in this universe, it’s a theory – I said a theory, I mean a theory – without a fact.


SHULTZ: So Milton and Rose, you have given us recently a wonderful book, Two Lucky People, but I’m here to tell you that we are the lucky people who’ve benefited so much from your influence and your ideas and your friendship. Thank you.