WEBVTT 1 00:00:02.120 --> 00:00:04.580 Welcome once again as MIT Economics Professor, 2 00:00:04.580 --> 00:00:07.910 Paul Samuelson, discusses the current economic scene. 3 00:00:07.910 --> 00:00:09.700 This biweekly series was produced 4 00:00:09.700 --> 00:00:11.890 for Instructional Dynamics Incorporated 5 00:00:11.890 --> 00:00:15.880 and was recorded September 7, 1971. 6 00:00:15.880 --> 00:00:18.499 I'm just back from a quick trip to Europe. 7 00:00:18.499 --> 00:00:23.120 It was interesting to be in London, 8 00:00:23.120 --> 00:00:26.570 talk to people in the city in the aftermath 9 00:00:26.570 --> 00:00:28.860 of President Nixon's decisive action 10 00:00:28.860 --> 00:00:31.290 with respect to the dollar 11 00:00:31.290 --> 00:00:34.250 and with respect to his domestic programs. 12 00:00:34.250 --> 00:00:38.202 Of course what interested people abroad most 13 00:00:38.202 --> 00:00:42.368 was the behavior of the foreign exchange rates 14 00:00:42.368 --> 00:00:45.330 rather than what interested the man 15 00:00:45.330 --> 00:00:50.143 in the street in America most, namely the wage price freeze. 16 00:00:51.450 --> 00:00:55.110 Let me then give you some of the reactions 17 00:00:55.110 --> 00:00:59.840 that I encountered in talking to merchant bankers, 18 00:00:59.840 --> 00:01:02.760 to financial people, to economists, 19 00:01:02.760 --> 00:01:07.760 and in a limited degree, to the man in the English streets 20 00:01:09.080 --> 00:01:12.583 in Birmingham and in London. 21 00:01:15.190 --> 00:01:18.494 On the whole, President Nixon's program has been received, 22 00:01:18.494 --> 00:01:23.204 according to my samplings, very well abroad. 23 00:01:23.204 --> 00:01:27.730 I spoke to one merchant banker who confessed 24 00:01:27.730 --> 00:01:29.764 that he didn't understand why they were, 25 00:01:29.764 --> 00:01:34.580 they, the English financial community 26 00:01:34.580 --> 00:01:36.350 and the continental financial community, 27 00:01:36.350 --> 00:01:38.580 were not being more beastly about 28 00:01:38.580 --> 00:01:40.860 the President Nixon's program and he said 29 00:01:40.860 --> 00:01:42.698 the explanation that came to him 30 00:01:42.698 --> 00:01:46.542 was that everybody abroad had realized 31 00:01:46.542 --> 00:01:50.268 that the previous House of International Finance 32 00:01:50.268 --> 00:01:52.118 was a house of cards 33 00:01:52.118 --> 00:01:57.118 and that it was in a transitional state which could not last 34 00:01:57.720 --> 00:02:02.720 and so it was with a feeling of relief in a sense 35 00:02:03.740 --> 00:02:08.270 that the president's cutting off convertibility 36 00:02:08.270 --> 00:02:11.870 with gold had taken place. 37 00:02:11.870 --> 00:02:16.817 That then is the single most common reaction abroad. 38 00:02:20.700 --> 00:02:22.880 That, I think, cannot last. 39 00:02:22.880 --> 00:02:25.160 The knives are beginning to be sharpened 40 00:02:25.160 --> 00:02:29.620 and we are increasingly receiving criticism 41 00:02:29.620 --> 00:02:32.100 and will receive more criticism, I will predict, 42 00:02:32.100 --> 00:02:36.709 from people abroad because of what seems to them 43 00:02:36.709 --> 00:02:41.709 to be the unilateral character of the American policy. 44 00:02:44.570 --> 00:02:49.370 I should like to say that although I never hesitate 45 00:02:49.370 --> 00:02:53.113 to criticize the administration, 46 00:02:54.219 --> 00:02:56.364 and I never hesitate to criticize President Nixon 47 00:02:56.364 --> 00:03:00.030 when I think that his utterances are incorrect 48 00:03:00.030 --> 00:03:04.216 or ill advised or that his policies are not working. 49 00:03:04.216 --> 00:03:09.216 Still, I do not believe 50 00:03:09.828 --> 00:03:14.828 that I should feel critical of him in this regard. 51 00:03:16.320 --> 00:03:21.320 We know that there has been behind the scenes negotiation 52 00:03:22.440 --> 00:03:23.990 between our treasury officials 53 00:03:23.990 --> 00:03:28.714 and our fellow reserve officials for years now, 54 00:03:28.714 --> 00:03:33.714 suggesting to foreign governments, 55 00:03:34.470 --> 00:03:36.780 putting pressure upon foreign governments 56 00:03:36.780 --> 00:03:38.930 to our introducing some kind of flexibility 57 00:03:38.930 --> 00:03:42.700 in the foreign exchange set up. 58 00:03:42.700 --> 00:03:45.607 This is not something that Governor Dewey Daane 59 00:03:45.607 --> 00:03:50.607 of the Federal Reserve can go onto television to talk about. 60 00:03:51.320 --> 00:03:56.320 This is not something which, under secretary Paul Volcker, 61 00:03:57.070 --> 00:03:59.800 and both of these men I wish to point out 62 00:03:59.800 --> 00:04:02.670 represent continuity with the previous administration, 63 00:04:02.670 --> 00:04:05.110 they occupied essentially the same positions 64 00:04:05.110 --> 00:04:10.110 that they now hold in both the Johnson Administration, 65 00:04:11.350 --> 00:04:13.140 closing years of the Johnson Administration 66 00:04:13.140 --> 00:04:14.820 and in the Nixon Administration. 67 00:04:14.820 --> 00:04:16.178 They could not emphasize this, 68 00:04:16.178 --> 00:04:21.178 but you could read between the lines and in the lines, 69 00:04:22.060 --> 00:04:25.810 going way back to the Copenhagen Meetings 70 00:04:25.810 --> 00:04:28.250 of the International Monetary Fund and Bank 71 00:04:28.250 --> 00:04:31.180 and even earlier that the United States was pressing 72 00:04:31.180 --> 00:04:33.930 for a greater flexibility. 73 00:04:33.930 --> 00:04:37.430 We were imploring the Japanese to appreciate the Yen, 74 00:04:37.430 --> 00:04:40.810 in their interest as well as in our own 75 00:04:40.810 --> 00:04:45.620 and so, President Nixon really had no choice 76 00:04:45.620 --> 00:04:47.823 but to grasp the nettle himself. 77 00:04:48.830 --> 00:04:53.000 This raises the question of the 10% surcharge 78 00:04:53.000 --> 00:04:58.000 which President Nixon introduced along with his de facto 79 00:05:00.133 --> 00:05:03.438 suspension of the curtain vertability of official gold. 80 00:05:03.438 --> 00:05:08.160 In common with most economists, 81 00:05:08.160 --> 00:05:13.160 I have reservations about protective tariffs, about quotas, 82 00:05:13.480 --> 00:05:15.583 and about surcharges. 83 00:05:16.460 --> 00:05:18.830 I go along with the conventional wisdom, 84 00:05:18.830 --> 00:05:22.140 which says that depreciation of the dollar 85 00:05:22.140 --> 00:05:24.700 relative to other currencies provides 86 00:05:24.700 --> 00:05:28.800 the proper kind of protection which our industries need 87 00:05:28.800 --> 00:05:31.650 in a time when our currency is overvalued 88 00:05:31.650 --> 00:05:36.650 and that therefore it is redundant to also have a surcharge. 89 00:05:38.940 --> 00:05:42.220 I don't think that for the purposes of revenue alone 90 00:05:42.220 --> 00:05:46.620 a surcharge is very defensible in this modern age 91 00:05:46.620 --> 00:05:51.620 and it certainly is calculated to annoy foreigners. 92 00:05:55.300 --> 00:05:56.760 We economists should point out 93 00:05:56.760 --> 00:06:00.133 that a good deal of this annoyance is irrational. 94 00:06:01.850 --> 00:06:06.430 If they are not annoyed by the depreciation of the dollar, 95 00:06:06.430 --> 00:06:09.960 they should not be annoyed by a surcharge 96 00:06:09.960 --> 00:06:13.810 which has many of the same effects. 97 00:06:13.810 --> 00:06:16.638 None the less, they are annoyed. 98 00:06:16.638 --> 00:06:21.638 And yet, as I review the three weeks which have passed 99 00:06:23.200 --> 00:06:25.980 since President Nixon announced his program, 100 00:06:25.980 --> 00:06:29.712 it does become increasingly apparent 101 00:06:29.712 --> 00:06:34.712 that without the surcharge as a tactical weapon, 102 00:06:35.250 --> 00:06:40.250 the governments and central banks abroad 103 00:06:41.260 --> 00:06:43.740 would not have been even so cooperative 104 00:06:43.740 --> 00:06:45.993 as they have already been. 105 00:06:47.860 --> 00:06:51.850 Considering that the Japanese central bank, 106 00:06:51.850 --> 00:06:54.570 under instructions from the Japanese Government, 107 00:06:54.570 --> 00:06:59.570 has paid out more than four billion dollars worth of Yen 108 00:06:59.810 --> 00:07:03.760 to support the old parity of the Yen 109 00:07:05.412 --> 00:07:09.560 taking on that number of unnecessary dollars. 110 00:07:09.560 --> 00:07:10.650 We have to ask ourselves, 111 00:07:10.650 --> 00:07:15.510 how obtuse, how recalcitrant would they have been 112 00:07:15.510 --> 00:07:18.622 if there had not been the surcharge 113 00:07:18.622 --> 00:07:22.213 to shape them into reality. 114 00:07:23.270 --> 00:07:24.380 Very well then. 115 00:07:24.380 --> 00:07:27.860 The initial first couple of weeks' impact 116 00:07:27.860 --> 00:07:30.860 of the President's program has been on the whole, favorable. 117 00:07:32.593 --> 00:07:34.651 I did detect when I was in London 118 00:07:34.651 --> 00:07:37.410 something of a feeling of anticlimax 119 00:07:38.370 --> 00:07:42.950 because once the foreign exchange markets were reopened, 120 00:07:42.950 --> 00:07:46.470 once the dollar and all the currencies de facto 121 00:07:46.470 --> 00:07:50.939 began to float, it turned out that the dollar 122 00:07:50.939 --> 00:07:54.848 did not get itself depreciated very much, 123 00:07:54.848 --> 00:07:57.433 vis a vis, other currencies. 124 00:07:58.840 --> 00:08:03.220 The typical figure is three percent, four percent, 125 00:08:03.220 --> 00:08:06.680 five percent, depending upon whether we're talking 126 00:08:06.680 --> 00:08:09.740 about the pound or whether we're talking about 127 00:08:09.740 --> 00:08:12.880 the continental currency 128 00:08:12.880 --> 00:08:14.830 or whether we're talking about the Yen. 129 00:08:15.670 --> 00:08:19.908 Was all this bother worthwhile for so minuscule 130 00:08:19.908 --> 00:08:23.513 an amount of depreciation. 131 00:08:24.780 --> 00:08:28.530 You certainly have to be a besotted admirer 132 00:08:28.530 --> 00:08:32.740 of the classical mechanism of international exchange 133 00:08:32.740 --> 00:08:36.730 to think that pici-unis changes of this magnitude 134 00:08:36.730 --> 00:08:39.720 could compensate for a very large 135 00:08:39.720 --> 00:08:42.770 overvaluation of the dollar. 136 00:08:42.770 --> 00:08:45.900 Moreover, if we look at the German Mark, 137 00:08:45.900 --> 00:08:50.522 we have to realize that prior to President Nixon's action, 138 00:08:50.522 --> 00:08:55.522 it had already appreciated by about seven percent 139 00:08:55.930 --> 00:08:58.920 and although I haven't reviewed and checked with 140 00:08:58.920 --> 00:09:00.708 the very latest quotations, 141 00:09:00.708 --> 00:09:04.830 my impression is that the German Mark, as I speak, 142 00:09:04.830 --> 00:09:08.980 is at just about the same degree of appreciation 143 00:09:08.980 --> 00:09:10.610 vis a vis the dollar as it was 144 00:09:10.610 --> 00:09:12.490 before President Nixon's action. 145 00:09:12.490 --> 00:09:16.110 So we've had no further improvement along that front. 146 00:09:16.110 --> 00:09:19.740 A little wonder, then, that there is a sense of anticlimax 147 00:09:19.740 --> 00:09:21.400 around the world. 148 00:09:21.400 --> 00:09:25.530 It reminds me a bit of the phony war period 149 00:09:25.530 --> 00:09:29.900 in World War Two from the end of August 1939, 150 00:09:29.900 --> 00:09:33.022 beginning of September, when World War Two began 151 00:09:33.022 --> 00:09:36.436 with the Nazi invasion of Poland 152 00:09:36.436 --> 00:09:41.050 until the following spring, there was very little action. 153 00:09:41.050 --> 00:09:45.230 The French were under the illusion that the Maginot Line 154 00:09:45.230 --> 00:09:46.878 was holding and would hold 155 00:09:46.878 --> 00:09:51.680 and the German's having, by blitzkrieg, gone through Poland 156 00:09:51.680 --> 00:09:56.220 were gathering their strength for a blitzkrieg 157 00:09:56.220 --> 00:09:59.883 through Norway and the low countries. 158 00:10:01.100 --> 00:10:03.990 In the interval, it looked as if there wasn't 159 00:10:03.990 --> 00:10:07.313 very much of any warfare going on. 160 00:10:08.150 --> 00:10:11.453 That was, we now know, the calm before the storm. 161 00:10:12.590 --> 00:10:17.570 In a sense then, I think that we should not be misled 162 00:10:17.570 --> 00:10:21.560 by the moderation of the depreciations. 163 00:10:23.800 --> 00:10:25.883 The story is not yet over. 164 00:10:27.620 --> 00:10:29.420 I state that as a prediction, 165 00:10:29.420 --> 00:10:33.140 but I also state that as a pious wish 166 00:10:33.140 --> 00:10:36.586 because we have not yet had 167 00:10:36.586 --> 00:10:40.612 the amount of adjustment that is needed. 168 00:10:40.612 --> 00:10:45.612 It would seem, therefore, that one should 169 00:10:45.904 --> 00:10:49.770 form a judgment as to what's going to happen 170 00:10:49.770 --> 00:10:51.640 and what ought to happen 171 00:10:51.640 --> 00:10:56.640 by considering what economic principle, 172 00:10:57.610 --> 00:11:01.014 what economic analysis, economic theory tells us 173 00:11:01.014 --> 00:11:06.014 is needed to change the situation which had prevailed 174 00:11:07.490 --> 00:11:11.973 prior to President Nixon's actions of August 15th. 175 00:11:12.990 --> 00:11:17.180 For this purpose, let me quote freely 176 00:11:17.180 --> 00:11:20.100 from a small piece which I wrote 177 00:11:20.100 --> 00:11:24.690 for the London Sunday Telegraph in the immediate aftermath 178 00:11:24.690 --> 00:11:27.723 of the President's action. 179 00:11:28.930 --> 00:11:30.716 As I read this over a few weeks later, 180 00:11:30.716 --> 00:11:35.716 I have no particular cause to regret 181 00:11:37.652 --> 00:11:42.400 that I shot from the hip when asked by the editor 182 00:11:42.400 --> 00:11:47.252 to give my views and I should point out 183 00:11:47.252 --> 00:11:51.780 that having necessarily having to shoot from the hip 184 00:11:51.780 --> 00:11:55.590 without time to learn about 185 00:11:55.590 --> 00:11:58.610 what the administration's own views were, 186 00:11:58.610 --> 00:12:03.350 I certainly did not speak for the administration, 187 00:12:03.350 --> 00:12:06.860 I never speak for the administration. 188 00:12:06.860 --> 00:12:09.558 There are plenty of excellent economists 189 00:12:09.558 --> 00:12:14.558 who are called upon to speak for the administration 190 00:12:15.506 --> 00:12:19.520 and some of the things I said run contrary 191 00:12:19.520 --> 00:12:21.766 to some of the things which subsequently 192 00:12:21.766 --> 00:12:26.766 I heard the President's Press Secretary, state. 193 00:12:28.260 --> 00:12:32.830 Well, let me quote freely from this particular report. 194 00:12:32.830 --> 00:12:35.177 It's called The Dollar Crisis. 195 00:12:35.177 --> 00:12:40.177 I began by saying that although speculators can be blamed 196 00:12:40.992 --> 00:12:45.992 for the de facto suspension of convertibility, 197 00:12:48.060 --> 00:12:50.130 the evaluation if you like, 198 00:12:50.130 --> 00:12:55.130 the basic long run forces were that the dollar 199 00:12:55.180 --> 00:12:58.450 had given every sign of being overvalued currency 200 00:12:58.450 --> 00:12:59.630 for many many years 201 00:13:00.490 --> 00:13:02.580 and what set the speculators off 202 00:13:02.580 --> 00:13:05.690 was the news that our merchandise trade surplus, 203 00:13:05.690 --> 00:13:08.900 which equilibrium would have to be whoppingly positive 204 00:13:08.900 --> 00:13:13.210 and here I want to endorse the testimony 205 00:13:13.210 --> 00:13:18.210 of just the last week of an expert in international finance, 206 00:13:19.072 --> 00:13:23.480 Eduard Bernstein, very prominent consultant 207 00:13:23.480 --> 00:13:25.470 on international finance to many governments, 208 00:13:25.470 --> 00:13:28.170 formerly of the US Treasury, 209 00:13:28.170 --> 00:13:30.869 formerly of the International Monetary Fund. 210 00:13:30.869 --> 00:13:34.040 Although I had no knowledge of his position, 211 00:13:34.040 --> 00:13:36.208 specific position at that time, 212 00:13:36.208 --> 00:13:41.208 his views and mine turn out to be pretty, nearly the same. 213 00:13:42.500 --> 00:13:45.302 That what we need for equilibrium 214 00:13:45.302 --> 00:13:50.302 is a strong, positive surplus in our merchandise trade 215 00:13:51.070 --> 00:13:51.966 and a strong, positive surplus 216 00:13:51.966 --> 00:13:56.966 in our current balance overall. 217 00:13:58.412 --> 00:14:01.860 Perhaps something like seven billion dollars 218 00:14:01.860 --> 00:14:05.600 and of course, as the second quarter figures came out, 219 00:14:05.600 --> 00:14:07.140 it became apparent to everybody 220 00:14:07.140 --> 00:14:10.240 that we were not only very far from that number, 221 00:14:10.240 --> 00:14:12.840 but we were actually going into the red, 222 00:14:12.840 --> 00:14:16.900 into negative numbers for the first time since 1893. 223 00:14:16.900 --> 00:14:21.900 This inevitably, set the speculators noses to twitching 224 00:14:21.919 --> 00:14:25.080 and finally when the Royce Committee of Congress, 225 00:14:25.080 --> 00:14:27.000 so the Joint Economic Committee, 226 00:14:27.000 --> 00:14:30.013 came out with the flat-footed statement 227 00:14:30.013 --> 00:14:34.520 that the dollar was overvalued and that if necessary, 228 00:14:34.520 --> 00:14:37.476 there ought to be a revaluation, 229 00:14:37.476 --> 00:14:40.470 even a revaluation of official gold, 230 00:14:40.470 --> 00:14:41.810 the fact was in the fire. 231 00:14:41.810 --> 00:14:45.730 I said for the readers of The Sunday Telegraph 232 00:14:45.730 --> 00:14:46.700 that it would be instructive 233 00:14:46.700 --> 00:14:51.373 if I were now to dream some dreams, so here I begin. 234 00:14:52.400 --> 00:14:57.400 One, I said, the American dollar is to be lowered in value 235 00:14:57.870 --> 00:15:02.110 relative to SDRs, that is paper gold and official tier gold 236 00:15:04.170 --> 00:15:06.410 which incidentally must never again be confused 237 00:15:06.410 --> 00:15:07.750 with the free market gold 238 00:15:07.750 --> 00:15:10.073 of dentists, gangsters, and hoarders, 239 00:15:11.040 --> 00:15:14.880 and if this lowering of value of the dollar, 240 00:15:14.880 --> 00:15:19.880 this is a de facto and perhaps de jure devaluation 241 00:15:20.490 --> 00:15:23.870 with respect to paper and official tier gold, 242 00:15:23.870 --> 00:15:27.690 should be by the order of magnitude of say, 12%. 243 00:15:27.690 --> 00:15:29.580 That was a good, generous figure. 244 00:15:29.580 --> 00:15:34.580 I noticed that Dr. Bernstein doesn't go quite that far 245 00:15:36.568 --> 00:15:39.480 and although I didn't know it at the time, 246 00:15:39.480 --> 00:15:40.490 remember I was writing 247 00:15:40.490 --> 00:15:43.619 in the immediate aftermath of the crisis, 248 00:15:43.619 --> 00:15:48.619 Pierre Schweitzer, head of the International Monetary Fund, 249 00:15:56.830 --> 00:16:00.290 had also been leaking to the press 250 00:16:00.290 --> 00:16:04.200 the work of the experts in the International Monetary Fund 251 00:16:04.200 --> 00:16:09.200 who hoped for at least a small de facto and de jure 252 00:16:10.926 --> 00:16:15.010 official devaluation of gold. 253 00:16:15.010 --> 00:16:17.958 It was that leaked to the press which elicited from 254 00:16:17.958 --> 00:16:21.850 Mr Ziegler, the President's Press Secretary, 255 00:16:21.850 --> 00:16:26.378 denial that the administration had any intention whatsoever 256 00:16:26.378 --> 00:16:29.693 of changing the price of gold. 257 00:16:31.380 --> 00:16:34.793 That was point number one in my dream. 258 00:16:35.670 --> 00:16:38.470 Point number two, is the currencies 259 00:16:38.470 --> 00:16:41.525 of the surplus countries, most notably, Japan 260 00:16:41.525 --> 00:16:45.123 are not to change at all with respect to official gold. 261 00:16:47.110 --> 00:16:50.075 Hence, the deficit-ridden American dollar 262 00:16:50.075 --> 00:16:54.500 would thereby be depreciated by at least 12%, 263 00:16:54.500 --> 00:16:57.193 relative to the currencies of the surplus countries. 264 00:16:59.900 --> 00:17:02.440 Three, what about Canada 265 00:17:02.440 --> 00:17:04.430 and the various New World currencies 266 00:17:04.430 --> 00:17:06.033 that form the American block? 267 00:17:07.170 --> 00:17:11.430 It would be presumed that these American block currencies 268 00:17:11.430 --> 00:17:16.430 would go all or most of the way the the revalued dollar. 269 00:17:16.578 --> 00:17:18.960 That is, they would be devalued 270 00:17:18.960 --> 00:17:23.933 with respect to official tier gold by 10 or 12%. 271 00:17:25.870 --> 00:17:29.430 This leads us, finally, with lots of intermediate countries, 272 00:17:29.430 --> 00:17:31.320 countries such as Britain, 273 00:17:31.320 --> 00:17:35.807 which had neither so hard a currency as the Mark or the Yen, 274 00:17:35.807 --> 00:17:39.620 but not so soft a currency as the dollar 275 00:17:39.620 --> 00:17:42.490 and they might be expected to go about halfway, 276 00:17:42.490 --> 00:17:47.160 vis a vis official gold or that fraction of the way 277 00:17:47.160 --> 00:17:48.900 which the degree of strength 278 00:17:48.900 --> 00:17:51.860 of the balance of payments position of those countries 279 00:17:51.860 --> 00:17:53.023 would seem to warrant. 280 00:17:55.890 --> 00:17:57.870 I concluded my dream by saying, 281 00:17:57.870 --> 00:18:01.440 there is no need to make exact guesses and judgments 282 00:18:01.440 --> 00:18:03.823 in these initial resettings of parodies. 283 00:18:05.060 --> 00:18:08.022 For it is high time the world should move to a regime 284 00:18:08.022 --> 00:18:10.880 in which some flexibility of exchange rates 285 00:18:10.880 --> 00:18:12.093 is the standard feature. 286 00:18:12.960 --> 00:18:15.070 Whether this takes the form of crawling pegs 287 00:18:15.070 --> 00:18:16.940 or freely floating exchange rates 288 00:18:16.940 --> 00:18:21.000 or floating exchange rates subject to some intervention 289 00:18:21.000 --> 00:18:25.470 by the respective governments and central banks 290 00:18:25.470 --> 00:18:27.193 is not important. 291 00:18:29.760 --> 00:18:33.640 Well now, my purpose was not to dream impractical dreams, 292 00:18:33.640 --> 00:18:36.750 but I think that above dream tells us something 293 00:18:36.750 --> 00:18:40.453 about the direction the pragmatic reality should aim for. 294 00:18:42.350 --> 00:18:44.670 I went on to say, the first order of business 295 00:18:44.670 --> 00:18:46.040 is appreciation of the Yen 296 00:18:47.610 --> 00:18:52.610 and I must confess I could not believe the stubbornness 297 00:18:52.770 --> 00:18:54.510 of the Japanese Government, 298 00:18:54.510 --> 00:18:58.390 what seemed to be the willful ignorance. 299 00:18:58.390 --> 00:19:00.314 I've since learned that there are 300 00:19:00.314 --> 00:19:02.404 internal political reasons for that. 301 00:19:02.404 --> 00:19:07.078 These consist not simply of the understandable pressure 302 00:19:07.078 --> 00:19:10.120 from the export industries, from the shipping industries, 303 00:19:10.120 --> 00:19:12.523 many of which have contracts and dollars. 304 00:19:13.840 --> 00:19:17.850 For after all, any particular harm to those industries, 305 00:19:17.850 --> 00:19:19.840 which the government doesn't wish to happen 306 00:19:19.840 --> 00:19:21.420 could be compensated by subsidy. 307 00:19:21.420 --> 00:19:25.130 There now is talk of some aid programs 308 00:19:25.130 --> 00:19:29.750 to the victims of a Yen appreciation, 309 00:19:29.750 --> 00:19:32.700 but the more important reason is more ephemeral, 310 00:19:32.700 --> 00:19:37.700 namely that particular people in the Japanese Government, 311 00:19:40.240 --> 00:19:43.580 in the administration, who are jockeying for the succession 312 00:19:43.580 --> 00:19:45.769 to Prime Minister Sato, 313 00:19:45.769 --> 00:19:49.580 have gone out on a limb in this regard 314 00:19:49.580 --> 00:19:54.330 and so as long as they held power in the councils, 315 00:19:54.330 --> 00:19:59.080 they had a personal interest which I may say is divergent 316 00:19:59.080 --> 00:20:01.730 both from the national interest of Japan 317 00:20:01.730 --> 00:20:05.340 and from the international interest of the world 318 00:20:05.340 --> 00:20:10.340 to try ostrich-like to maintain the previous parody 319 00:20:11.440 --> 00:20:14.123 of the Yen relative to the dollar. 320 00:20:17.470 --> 00:20:18.750 Very well then. 321 00:20:18.750 --> 00:20:23.240 We'll suppose that the, that the Yen is appreciated 322 00:20:23.240 --> 00:20:28.100 by the amount roughly that I spoke of 10, 12, 15% 323 00:20:28.100 --> 00:20:30.383 one now begins to hear. 324 00:20:31.930 --> 00:20:33.520 The second order of business, I said, 325 00:20:33.520 --> 00:20:36.800 and now remember I'm writing for European audience 326 00:20:37.980 --> 00:20:40.410 is for all informed people abroad 327 00:20:40.410 --> 00:20:43.230 to realize that a depreciated dollar 328 00:20:43.230 --> 00:20:47.470 carries no threat of a massive invasion 329 00:20:47.470 --> 00:20:50.653 of European markets by American goods and services. 330 00:20:52.770 --> 00:20:55.130 I may say that I could only wish 331 00:20:55.130 --> 00:20:58.040 that such a massive invasion of European markets 332 00:20:58.040 --> 00:21:01.190 as a result of the kinds of exchange depreciates 333 00:21:01.190 --> 00:21:03.850 that I'm speaking of could possibly 334 00:21:03.850 --> 00:21:05.803 be feasibly in the cards. 335 00:21:06.676 --> 00:21:10.873 For if such a massive invasion were feasibly in the cards, 336 00:21:11.740 --> 00:21:15.470 it would enable us to restore equilibrium 337 00:21:15.470 --> 00:21:19.433 with a more moderate adjustment of parodies. 338 00:21:21.920 --> 00:21:26.920 Well, the sad truth is that it's not in the cards. 339 00:21:28.040 --> 00:21:30.310 At the same time that European intellectuals 340 00:21:30.310 --> 00:21:33.820 have been writing bestsellers on the challenge 341 00:21:33.820 --> 00:21:35.950 of the American leviathan, 342 00:21:35.950 --> 00:21:40.950 and have been bemused with America's competitive advantage 343 00:21:42.090 --> 00:21:44.293 in the realms of computers and aircraft, 344 00:21:45.130 --> 00:21:48.085 there are simple minds which cannot look beyond 345 00:21:48.085 --> 00:21:51.890 the two most dramatic aspects of our technology 346 00:21:51.890 --> 00:21:54.120 and civilization, namely computers and aircraft 347 00:21:54.120 --> 00:21:58.200 and forget how little these are in total importance 348 00:21:58.200 --> 00:22:00.720 relative to the total of goods in international trade 349 00:22:00.720 --> 00:22:03.713 and relative to the total of goods in the GNP. 350 00:22:04.550 --> 00:22:07.430 But while they were bemused with this American challenge, 351 00:22:07.430 --> 00:22:10.510 of course I have referenced to Servan-Schreiber's book 352 00:22:10.510 --> 00:22:13.520 on that, with that title. 353 00:22:13.520 --> 00:22:16.679 The statisticians have been recording a steady 354 00:22:16.679 --> 00:22:20.320 and almost unprecedented deterioration 355 00:22:20.320 --> 00:22:23.230 in the competitiveness of American industry. 356 00:22:23.230 --> 00:22:26.589 Take for example, our steel industry. 357 00:22:26.589 --> 00:22:31.589 Let no one think that a five percent or a 10% 358 00:22:31.720 --> 00:22:35.620 or even a 15% depreciation relative to the Yen 359 00:22:35.620 --> 00:22:37.870 and half that much depreciation relative 360 00:22:37.870 --> 00:22:40.130 to some other principle currencies 361 00:22:40.130 --> 00:22:42.946 would mean that American steel is gonna begin to 362 00:22:42.946 --> 00:22:46.840 land in European ports and Japanese ports 363 00:22:46.840 --> 00:22:48.810 and Australian ports. 364 00:22:48.810 --> 00:22:50.967 Our cost competitiveness is so far 365 00:22:50.967 --> 00:22:55.967 from being of the order of a 15% that 366 00:22:57.273 --> 00:23:00.210 that industry will still, I think, 367 00:23:00.210 --> 00:23:04.250 be screaming for protection and economists like me 368 00:23:04.250 --> 00:23:09.250 will still be objecting to favored treatment 369 00:23:09.310 --> 00:23:11.023 of such industries. 370 00:23:13.480 --> 00:23:16.129 Well, the dream world is over 371 00:23:16.129 --> 00:23:21.129 in which industry abroad could flood our markets 372 00:23:21.660 --> 00:23:24.310 and displace more American workers 373 00:23:26.130 --> 00:23:28.982 under the illusion that accepting return 374 00:23:28.982 --> 00:23:32.450 any amount of dollars, IOUs, if the process were generated, 375 00:23:32.450 --> 00:23:33.550 that this could go on. 376 00:23:34.910 --> 00:23:36.920 I had a letter from an old teacher of mine, 377 00:23:36.920 --> 00:23:40.400 Professor Hobueller, I had said some unkind words 378 00:23:40.400 --> 00:23:45.044 about the nine and neglect as ostrich-like policy 379 00:23:45.044 --> 00:23:50.044 which should have been forseeably understood 380 00:23:51.794 --> 00:23:54.490 not to be able to last 381 00:23:54.490 --> 00:23:58.172 and Professor Hobueller wrote that he had a clear conscious 382 00:23:58.172 --> 00:24:01.333 even though his pamphlet had used that title 383 00:24:01.333 --> 00:24:06.333 because what's the matter so long as the rest of the world 384 00:24:06.620 --> 00:24:11.210 will continue to send us goods for nothing. 385 00:24:11.210 --> 00:24:15.110 Why should we not accept them? 386 00:24:15.110 --> 00:24:17.570 And he went on to say in the teeth of the present crisis 387 00:24:17.570 --> 00:24:21.167 that the Japanese want to go on accepting dollars, 388 00:24:21.167 --> 00:24:26.100 that there was nothing wrong about, 389 00:24:26.100 --> 00:24:28.920 I'm not quoting him correctly and with full qualifications, 390 00:24:28.920 --> 00:24:33.920 the displacement of our industries by the Japanese imports. 391 00:24:36.240 --> 00:24:38.120 My answer was that this represented 392 00:24:38.120 --> 00:24:41.380 exactly the kind of thinking that I said was ostrich-like 393 00:24:41.380 --> 00:24:45.700 because it was unbelievable that the Japanese 394 00:24:45.700 --> 00:24:49.220 would in fact go on doing what they were doing 395 00:24:49.220 --> 00:24:51.450 in the first days of the crisis, 396 00:24:51.450 --> 00:24:55.810 namely buying for Yen any amount of dollars 397 00:24:55.810 --> 00:24:59.520 thrust to them at the previous parody. 398 00:24:59.520 --> 00:25:03.630 One must be realistic in making forecasts 399 00:25:03.630 --> 00:25:07.390 and that process cannot last and I would not 400 00:25:07.390 --> 00:25:09.280 disorganize any American industries 401 00:25:09.280 --> 00:25:12.817 in the expectation that we would have perpetual dumping 402 00:25:12.817 --> 00:25:17.817 of good Japanese goods on American consumers 403 00:25:19.393 --> 00:25:23.930 that would last and of course it has not lasted 404 00:25:23.930 --> 00:25:26.460 and would not last. 405 00:25:26.460 --> 00:25:30.063 Now, I dreamt a pleasant dream of the outcome. 406 00:25:31.040 --> 00:25:32.530 I may say that I don't wanna insist 407 00:25:32.530 --> 00:25:34.288 upon the details of it here, 408 00:25:34.288 --> 00:25:39.288 I have no particular brief for changing de facto or de jure 409 00:25:40.090 --> 00:25:41.660 the price of official gold, 410 00:25:41.660 --> 00:25:44.470 I just thought realistically that this was something 411 00:25:44.470 --> 00:25:49.280 which the Europeans would accept more readily 412 00:25:49.280 --> 00:25:51.870 and that it had none of the bad consequences 413 00:25:51.870 --> 00:25:55.096 or almost none of the bad consequences of the previous 414 00:25:55.096 --> 00:26:00.096 revaluations of gold before we had the two tier system, 415 00:26:02.420 --> 00:26:04.810 but let me in concluding say, 416 00:26:04.810 --> 00:26:07.540 that I also have a nightmare 417 00:26:09.670 --> 00:26:14.440 and that nightmare is that the world will turn into 418 00:26:14.440 --> 00:26:19.440 a chaos of exchange controls of trade wars 419 00:26:19.600 --> 00:26:22.110 and a tendency towards universal autarchy 420 00:26:23.050 --> 00:26:25.696 and already on my travels I have seen 421 00:26:25.696 --> 00:26:28.780 that there is an increase 422 00:26:28.780 --> 00:26:32.720 in the amount of exchange of controls. 423 00:26:32.720 --> 00:26:35.230 So, that although unilateral action 424 00:26:35.230 --> 00:26:37.980 by the President was necessary in grasping the nettle, 425 00:26:37.980 --> 00:26:40.060 in throwing the ball into the court 426 00:26:40.060 --> 00:26:42.240 of the Europeans and of the Japanese, 427 00:26:42.240 --> 00:26:45.384 we do not have unilateral power to introduce 428 00:26:45.384 --> 00:26:48.852 a nice state of flexible exchange rates 429 00:26:48.852 --> 00:26:53.280 near to the proper equilibrium parodies. 430 00:26:53.280 --> 00:26:54.820 We are in the same boat. 431 00:26:54.820 --> 00:26:58.400 There is a problem of persuasion here 432 00:26:58.400 --> 00:27:03.400 and the outcome is by no means optimistically clear. 433 00:27:04.360 --> 00:27:05.930 If you have any questions or comments 434 00:27:05.930 --> 00:27:08.290 for Professor Samuelson, address them to 435 00:27:08.290 --> 00:27:10.470 Instructional Dynamics Incorporated 436 00:27:10.470 --> 00:27:12.850 166 East Superior Street 437 00:27:12.850 --> 00:27:14.533 Chicago, Illinois 60611.