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“A Cold Day for Britain”
by Milton Friedman
Newsweek, 27 November 1972, p. 87
©The Newsweek/Daily Beast Company LLC
The wage and price freeze just imposed in Britain is almost a duplicate of the freeze that
President Nixon imposed in the U.S. on August 15, 1971. But the circumstances under which
prices were frozen are very different. As a result, the two actions will have very different results.
When President Nixon froze prices and wages, inflation was already receding in the U.S. The
rate of rise of consumer prices had come down from nearly 7 percent in early 1970 to less than 4
percent in mid-1971. Inflation has continued to recede since, but the further improvement has
been less than in the year and a half preceding the freeze.
The reduction in the pace of inflation was produced by the monetary and fiscal policies followed
in 1969 and 1970—slower monetary growth reinforced by slower growth in government
spending. These policies held down the increase in total spending which, in turn, put a damper
on inflation, but also produced as an undesirable by-product the recession of 1970. There was no
other effective way to stop the accelerating inflation that President Nixon had inherited.
The price freeze and the subsequent wage and price controls seemed to me, at the time, a
mistake, and I am of the same opinion still. Yet, in their defense, it can be said that they worked
with, not against, the trend of the basic economic forces. Indeed, one of my major objections to
them—and one that has loomed ever larger since—is that they would be given credit for results
that were attributable to other forces, and that, in consequence, the public would be misled into
believing that they really are an effective way to halt inflation.
The U.S. episode was highly unusual. Price and wage controls have almost never been
introduced when inflation and the excess demand producing it were tapering off. They have
almost always been introduced under precisely the opposite conditions, to try to offset
inflationary monetary and fiscal policies when the political will was lacking to change the
monetary and fiscal policies themselves.
That is the current British situation. After tapering off from mid-1971 to mid-1972, inflation then
started to accelerate rapidly—to a current rate of about 8 percent. The quantity of money has
been on an explosive course. The narrowly defined money supply (currency and demand
deposits), which was almost constant in 1969, has been rising at a 16 percent rate in the past six
months; the broadly defined money supply (including time and savings deposits), which rose at a
rate of 3 percent in 1969, has been rising at a 24 percent rate in the past six months. Government
spending and deficits have similarly been growing rapidly.
It is one thing to freeze prices and wages when inflation is proceeding at a 3 to 4 percent rate and
is already coming down. It is a very different thing to freeze them when inflation is proceeding at
an 8 percent rate and heading still higher. Even if the freeze were accompanied by a drastic
reduction in the rate of monetary growth and in government spending and deficits, it would be
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working against the underlying forces, since it takes many months before a change in monetary
and fiscal policy can check an accelerating inflation. Yet in that case, there would at least be
some restraining forces in the background. So far, however, there is little sign—outside of brave
talk—that the Conservative government is prepared to reinforce the freeze with effective
monetary and fiscal restraint.
Britain has been through all this before—during and after World War Two, when price and wage
controls were used in an attempt to suppress the inflation arising from wartime spending,
financed largely by increasing the money supply.
That attempt to bottle up excess demand produced shortages, queues, and rationing. Indeed, they
were so prominent that the riddle went around: “Other nations have their national flags, national
mottoes, national flowers; Britain is the only Western nation that has a national letter. What is
it?” Answer: “Q.”
Britain is on its way to repeating that experience —unless the freeze and controls collapse
entirely in the next few months, as they well may.
It is hard to find the silver lining in this dark cloud. But perhaps the British experience will shock
the public out of the view—which the U.S. freeze has done so much to spread—that controls are
an effective—or at least harmless—way to curtail inflation.
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Compiled by Robert Leeson and Charles Palm as part of their “Collected Works of Milton
Friedman” project.
Reformatted for the Web.
10/25/12
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