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- | Welcome to another in a series | 0:02 |
of weekly commentaries on today's economic scene, | 0:03 | |
produced by Instructional Dynamics Incorporated. | 0:06 | |
With us again this week, the week of December 30th, | 0:09 | |
is Professor Paul Samuelson of the Department of Economics | 0:12 | |
at the Massachusetts Institute of Technology. | 0:15 | |
Professor Samuelson, a couple of weeks ago | 0:19 | |
you were discussing the theories | 0:22 | |
behind foreign exchange rates. | 0:23 | |
Do you have more to say on that subject this week? | 0:25 | |
- | I'd like, today, to continue that analysis | 0:27 |
of the principles that underline | 0:31 | |
the international balance of payments. | 0:33 | |
Perhaps it would be as well for me, first, | 0:35 | |
to summarize a few of the things that I said | 0:38 | |
in my earlier introductory tape on this subject. | 0:41 | |
You will recall that I discussed the balance of trade, | 0:44 | |
the surplus or deficit of exports of goods and services, | 0:52 | |
in comparison with imports of goods. | 0:57 | |
We saw that the balance of merchandise trade | 1:01 | |
must be amplified to include the so-called invisible items. | 1:05 | |
The excess, for example, of our shipping | 1:11 | |
and insurance services provided | 1:14 | |
over what foreigners provide of shipping | 1:16 | |
and insurance services for us. | 1:19 | |
The excess of the dividends and interest | 1:22 | |
that we receive from our investments abroad, | 1:25 | |
over the dividends and interest | 1:28 | |
which we have to pay out to foreigners | 1:31 | |
who own stocks and bonds in this country. | 1:34 | |
The excess of our tourist expenditures abroad, | 1:37 | |
in comparison with tourist expenditures in this country. | 1:42 | |
When we include all of these invisibles, | 1:48 | |
carefully putting in on the credit side | 1:51 | |
all things which, like exports of goods, | 1:55 | |
provide us with foreign exchange, | 1:58 | |
and being very careful to put in on the debit side, | 2:00 | |
all things which, like imports, use up foreign exchange. | 2:03 | |
When we do all this, we get the balance on current account. | 2:08 | |
And if that is imbalance, and if we rule out | 2:13 | |
capital movements as I did in my last tape, | 2:18 | |
there's nothing more to be said. | 2:20 | |
We are in equilibrium. | 2:21 | |
If, however, we have a surplus on current account, | 2:23 | |
that surplus must somehow be met. | 2:26 | |
It must be met by IOU's from foreigners, | 2:29 | |
that is, capital movements, | 2:34 | |
which I'm ruling out for the moment, | 2:35 | |
or in the absence of capital movements, | 2:37 | |
it must be met by a shipment of gold. | 2:40 | |
Now, I have talked about a surplus | 2:42 | |
and a shipment of gold into the United States. | 2:44 | |
That was very typical of the period of the 1930s. | 2:48 | |
Indeed, in 1949, just before the Marshall Plan | 2:52 | |
really got going in a big way, | 2:58 | |
we had a corner on gold in the world. | 3:00 | |
We had something, as I recall, | 3:03 | |
like $26 billion worth of gold, | 3:04 | |
and that was the preponderant fraction of all the gold | 3:07 | |
available for international reserves anywhere in the world. | 3:15 | |
That is no longer the case. | 3:19 | |
We have steadily, since 1949, been losing gold. | 3:21 | |
That loss in gold, which took place | 3:26 | |
continuously since that time, | 3:27 | |
was welcomed by most economists as a good thing. | 3:32 | |
We had too much gold. | 3:36 | |
The rest of the world, which was prospering, fortunately, | 3:37 | |
needed to rebuild its money systems. | 3:42 | |
They needed to have an increase in gold reserves. | 3:45 | |
It was a good thing for us to let the gold go. | 3:49 | |
In return, we got very many valuable things. | 3:54 | |
We got an excess of imports of real goods | 3:57 | |
which we couldn't otherwise have had. | 4:01 | |
We also got a lot of investments abroad. | 4:04 | |
And so, the loss of gold to the present level | 4:08 | |
of something like 10 billions of dollars | 4:12 | |
would be welcome if there was an end in sight, | 4:15 | |
if we knew there was to be an equilibrium | 4:21 | |
at, say, eight billion of gold under the old system, | 4:24 | |
that would have been satisfactory. | 4:29 | |
But what I'd like to talk about today | 4:32 | |
is the fact that there has not been an equilibrium. | 4:35 | |
In my judgment, there is still not an equilibrium in sight, | 4:37 | |
and we want to discuss what the reasons for that are. | 4:41 | |
- | Professor Samuelson, exactly what do you mean | 4:45 |
when you refer to an equilibrium? | 4:49 | |
- | When I speak of a basic equilibrium | 4:52 |
in international trade, I don't have in mind | 4:55 | |
anything so superficial as that, somehow, | 4:58 | |
our total balance of payments balance out. | 5:02 | |
That's a mere tautology. | 5:05 | |
What we import from abroad in excess | 5:08 | |
of what we export from abroad | 5:12 | |
must either be paid for by gold or by IOUs. | 5:15 | |
What economists have in mind when they speak | 5:19 | |
of equilibrium is a situation in which | 5:21 | |
the flow of IOUs back and forth | 5:24 | |
is at a level which can be maintained. | 5:26 | |
It's at a level that | 5:30 | |
individuals on the whole want to have happen. | 5:32 | |
It is in a framework of freedom | 5:36 | |
in which no individual merchant, and certainly no tourist, | 5:40 | |
ever bothers his pretty little head | 5:44 | |
about the welfare of the United States Treasury | 5:47 | |
or of the economy as a whole. | 5:51 | |
When I operate as a consumer, I'm not supposed to say | 5:54 | |
"What I am doing today, this French wine | 5:58 | |
"that I am drinking in the privacy of my home, | 6:01 | |
"is that really justified in terms | 6:04 | |
"of the balance of international payments?" | 6:07 | |
All that I'm supposed to say is, | 6:09 | |
"Given the $6 a fifth that I must pay for this French wine, | 6:10 | |
"is it a better buy in terms of my palate, my tastes, | 6:17 | |
"than a California wine at $2 and a quarter?" | 6:21 | |
And that should be the end of it. | 6:25 | |
Well, using that definition of equilibrium, | 6:27 | |
I can propose a very simple test | 6:31 | |
to see whether a country is in equilibrium. | 6:34 | |
Suppose that there was no pegging of the exchange rate | 6:37 | |
between the dollar and the Mark. | 6:41 | |
I will use the Mark as the typical non-US currency. | 6:43 | |
This exaggerates the situation, | 6:49 | |
because the German Mark happens to belong to the country | 6:52 | |
which is in greatest surplus equilibrium, | 6:55 | |
just as the United States, in a sense, | 6:58 | |
is in one of the greatest basic | 7:01 | |
deficit disequilibria, in my judgment. | 7:08 | |
But the example will suffice. | 7:11 | |
If we had freedom, if we have cut ourselves off | 7:14 | |
from gold, as we have done. | 7:18 | |
We have a two-tier of price gold system | 7:19 | |
in which we no longer care what's happening | 7:24 | |
in the Zurich and Paris gold markets. | 7:27 | |
Let the Mark be priced today at 25 cents. | 7:32 | |
Everybody can go to his banker | 7:37 | |
and for a dollar get four Marks, | 7:39 | |
and any German for four Marks can get a dollar. | 7:41 | |
Now, if there are more Germans demanding dollars | 7:46 | |
than there are Americans demanding Marks at this price, | 7:51 | |
there would be what was called the dollar shortage. | 7:57 | |
This characterized international finance discussions | 8:03 | |
from the end of the war in 1945 | 8:09 | |
until, oh, I would say 1955 or 1957 or thereabouts. | 8:13 | |
Actually, many of the discussions continued beyond that time | 8:18 | |
because we economists are not always on the ball, | 8:21 | |
and sometimes we just perfect our understanding of phenomena | 8:25 | |
after it has disappeared. | 8:30 | |
Well the dollar shortage meant that at existing parities, | 8:33 | |
there was a greater demand for American goods | 8:37 | |
than there was a supply of dollars available | 8:45 | |
to foreigners at this price. | 8:48 | |
Now, if there were no official intervention | 8:51 | |
and we cut ourselves off from traditional gold standard, | 8:55 | |
the price of the Mark would be set from day to day | 8:58 | |
at 25 cents by supply and demand. | 9:01 | |
It's just like any auction market. | 9:05 | |
It's like the Board of Trade in Chicago, where wheat | 9:06 | |
goes up in price if demand rises relative to supply | 9:08 | |
or goes down in price if supply rises relative to demand. | 9:12 | |
So it would be with the German Mark. | 9:15 | |
It would be 25 cents at one moment of time. | 9:18 | |
It would be 25.02 at another. | 9:22 | |
It would be 24.98 at another time. | 9:25 | |
And I would define basic equilibrium | 9:29 | |
as a situation in which under those circumstances, | 9:32 | |
the price of the Mark would oscillate within the range, | 9:36 | |
any fixed range, in this case, 25 cents. | 9:42 | |
Of course, there would be a Brownian motion | 9:46 | |
up and down around that level, depending upon the season, | 9:48 | |
but experienced speculators would learn | 9:51 | |
that they could perform a scalping function. | 9:55 | |
If the Mark and dollar were in fundamental equilibrium, | 9:58 | |
then if a temporary glut of Marks came on the market, | 10:02 | |
a speculator would realize that as the price | 10:10 | |
of the Mark dropped, he could advantageously buy it, | 10:12 | |
put it in inventory, and spit it out later | 10:15 | |
in a favorable way, just as there are scalpers | 10:18 | |
on the Board of Trade in Chicago | 10:22 | |
who go home each night with no net position wheat | 10:25 | |
but have made hundreds of transactions during the day | 10:28 | |
and have been evening out the prices. | 10:30 | |
- | Now that I understand equilibrium, Professor Samuelson, | 10:35 |
could you explain to me why we don't have it? | 10:38 | |
- | My basic diagnosis of why the dollar has gone | 10:41 |
from being undervalued in the days of the dollar shortage | 10:45 | |
through a momentary position of equilibrium | 10:50 | |
and on to a position of being overvalued | 10:54 | |
has to do basically with three things. | 10:58 | |
First, with technological change. | 11:03 | |
Second, and related to the first, | 11:07 | |
with the new prospects for using American management | 11:12 | |
and American capital abroad. | 11:18 | |
And third, and here I bring in government, | 11:22 | |
it has to do with our national policies | 11:25 | |
with respect to security, using the term | 11:30 | |
"security" in the broadest sense, | 11:34 | |
to include NATO, to include our foreign aid programs, | 11:36 | |
which we legislate by majorities in Congress, | 11:41 | |
and of course by all means our Vietnam War. | 11:46 | |
Let me pick these points up one by one. | 11:53 | |
The first, which is technological change, | 11:57 | |
is the longest-run factor. | 11:59 | |
What we have had after World War II | 12:04 | |
is a miracle in the common market countries and in Japan. | 12:06 | |
It almost pays to be an enemy, the cartoonist says, | 12:12 | |
because we find remarkable progress being made | 12:16 | |
by Germany, by Japan, and if we think of France | 12:21 | |
as an occupied country during the war, France and Italy, | 12:27 | |
those countries have been growing | 12:31 | |
in real terms at a fast rate. | 12:34 | |
I attribute this to the fact that we are | 12:39 | |
in a new regime of mixed economies. | 12:41 | |
We are not in old-fashioned laissez-faire capitalism, | 12:45 | |
and we cannot match, in the historical records, | 12:49 | |
sprints of growth of the duration | 12:55 | |
and of the amplitude and magnitude | 12:58 | |
that we have found in Western Germany, | 13:00 | |
in the common market countries generally. | 13:05 | |
It's as true, by the way, of a country like Sweden, | 13:07 | |
which some of us think of as socialistic, | 13:12 | |
but which a trip to Sweden shows | 13:16 | |
how superficial that label can be, | 13:19 | |
as it is of Switzerland, which some of us | 13:21 | |
think of as a haven of laissez-faire, | 13:24 | |
but a very close examination of what actually happens | 13:27 | |
in the Swiss economy shows | 13:30 | |
that it has a degree of directedness by the government | 13:32 | |
that no country in the world could have dreamed of | 13:39 | |
in the pre-1914 antebellum world. | 13:43 | |
I welcome this as a good citizen of the world, | 13:48 | |
this great increase in productivity, | 13:51 | |
so that the countries like Austria, | 13:55 | |
countries like Greece, countries like Western Germany, | 13:58 | |
grow or have grown year after year | 14:03 | |
in real terms at rates like 6% and 8%, | 14:07 | |
and countries like Japan have had real rates of growth | 14:11 | |
of 8%, 10%, 12%, and even in some unusual years 15%. | 14:15 | |
This is almost without precedent in history, | 14:23 | |
and it is due, in my judgment, to the fact that | 14:26 | |
there's a closing of the technological gap | 14:30 | |
between the United States and the rest of the world. | 14:34 | |
Now, I know, I can see that you're raising your eyebrows | 14:38 | |
at the closing of the gap because there are best-sellers | 14:42 | |
on the bookshelves today which say | 14:45 | |
that the technological gap | 14:49 | |
is widening between America and France. | 14:51 | |
Mr. Servan-Schreiber, who's in the country at the moment, | 14:55 | |
has made a fortune on his book The American Challenge, | 14:58 | |
in which he claims the opposite | 15:04 | |
of a closing of the technological gap is taking place. | 15:05 | |
I think there is no real contradiction | 15:08 | |
between our viewpoints. | 15:10 | |
He is looking at aviation, aerospace industry. | 15:12 | |
He is looking at the computer. | 15:17 | |
These are dramatic instances at the frontier of science, | 15:19 | |
and there America does still have a comparative advantage. | 15:24 | |
But we have lost a comparative advantage | 15:28 | |
in many of the less glamorous technological operations. | 15:32 | |
It's like the case within this country of the pot. | 15:43 | |
The pot does a great deal of research. | 15:46 | |
When a thing is new, the pot makes | 15:49 | |
a good deal of money on it. | 15:51 | |
The minute it becomes cut and dried, | 15:52 | |
somebody else can be a lower-cost producer than the pot, | 15:54 | |
and the pot has to be running, running, running | 15:57 | |
in order to stand still and finding new things. | 16:02 | |
So it is with America. | 16:04 | |
And I would say that it's the vanity | 16:05 | |
of the European intellectual which is hurt the most, | 16:08 | |
and that is why he screams about the technological gap. | 16:11 | |
In the old days, we were richer | 16:15 | |
than the Europeans, but we were dumber. | 16:16 | |
Now, the best physics and the Nobel prizes and so forth | 16:19 | |
are being done in Berkeley and in Pasadena | 16:23 | |
and not in Berlin and Paris. | 16:26 | |
And it is this combination | 16:31 | |
that infuriates the European intellectual. | 16:33 | |
But in any case, if we turn to the actual | 16:37 | |
standard of living of the working man, | 16:40 | |
real wages have been rising much, much, much more rapidly | 16:43 | |
in those countries than in the United States. | 16:46 | |
And that's not hard to understand | 16:48 | |
because they have one great advantage. | 16:50 | |
They can imitate our technology and reduce the gap. | 16:53 | |
This is also an advantage which the Soviet Union has. | 16:59 | |
It's an advantage which anybody has | 17:02 | |
who can have access to a library. | 17:05 | |
Now, this basic factor, coupled with the fact | 17:09 | |
that money wages in those countries, | 17:14 | |
although they've been rising very rapidly | 17:17 | |
and much more rapidly than in our own country, | 17:19 | |
were for a long time not rising so fast | 17:23 | |
in terms of these productivity miracles | 17:29 | |
as our money wages were rising | 17:32 | |
in terms of our more modest, steady technological advance. | 17:34 | |
And as a result, American goods, | 17:40 | |
which had been cheap in the immediate post-war era, | 17:42 | |
turned out at existing parities 25 cents to the Mark. | 17:46 | |
I'm trying to avoid $35 per ounce of gold because | 17:52 | |
I want to divorce this discussion completely from gold | 17:55 | |
and just make it a question of different currencies. | 17:58 | |
As a result of this, technological miracle is catching up, | 18:01 | |
American goods became expensive, | 18:06 | |
and European and Japanese goods became relatively cheap. | 18:09 | |
The result showed up in our trade | 18:13 | |
and private account balances. | 18:17 | |
- | Well then, Professor Samuelson, | 18:21 |
what about your other basic factors? | 18:23 | |
- | We add to this technological miracle | 18:26 |
the fact that American firms have learned | 18:29 | |
that they can go abroad and use their know-how | 18:32 | |
and their capital to advantage abroad. | 18:36 | |
We can completely explain the great outburst | 18:38 | |
of private direct investment | 18:43 | |
in the European common market countries. | 18:44 | |
You can't go on an airplane these days | 18:49 | |
without encountering American businessmen | 18:52 | |
who are engaged in starting up branch plants. | 18:56 | |
They've leaned that American workers | 19:01 | |
are not 6-feet-10 in height and European workers pygmies. | 19:03 | |
In Scotland or northern Ireland, the workers | 19:12 | |
are not quite as efficient as they are in Des Moines, Iowa, | 19:15 | |
but they're paid a good deal less. | 19:21 | |
And with American know-how and management, | 19:23 | |
and with the most modern machines, | 19:26 | |
they can produce to very considerable advantage | 19:28 | |
the same goods as the Americans can do, | 19:32 | |
and this has been happening. | 19:36 | |
Now, this is the second factor which has caused, | 19:37 | |
in my judgment, the dollar to be out of basic equilibrium, | 19:41 | |
because I don't think this is a flash in the pan. | 19:45 | |
This is a cool money response | 19:48 | |
to a true economic opportunity. | 19:51 | |
And in a regime of freedom, you're supposed to | 19:58 | |
be able to do anything that you want to do. | 20:00 | |
Now, it's a favorite game of people | 20:03 | |
to measure the size of what they regard to be the deficit, | 20:05 | |
and then look in the balance of payments | 20:10 | |
for one item which is of that same size. | 20:11 | |
If you like, you can say, "Oh, it's all due to tourism." | 20:14 | |
Or if you like, "It's all due to | 20:17 | |
"our foreign aid and Vietnam War." | 20:18 | |
Or if you like, "It's all due to our foreign investment." | 20:23 | |
Benjamin Graham, who's a very noted stock market analyst | 20:27 | |
and an acute economist in his own right, | 20:33 | |
wrote articles years ago pointing out | 20:38 | |
that the size of our outflow of private direct investment | 20:41 | |
was equal to what he regarded as our deficit, | 20:44 | |
and he took it as almost automatic | 20:49 | |
that we ought to do something about that. | 20:54 | |
Well, according to my definition of basic equilibrium, | 20:57 | |
if you have to do something about it | 20:59 | |
in the form of voluntary or mandatory controls, | 21:01 | |
you are not in basic equilibrium. | 21:04 | |
Finally, we have our Cold War expenditures, | 21:07 | |
which involve a great deal of offshore dollars. | 21:12 | |
Now, to be sure, we have tied lots of those dollar aids | 21:15 | |
so that it becomes very difficult for us to know | 21:20 | |
how much of a drainage on our balance of payments, | 21:23 | |
how much of a debit item, these do constitute. | 21:26 | |
That's one of the signs of a basic disequilibrium. | 21:29 | |
You do so many ad hoc things that pretty soon, | 21:33 | |
you cannot accurately measure the amount | 21:35 | |
of the basic disequilibrium. | 21:41 | |
Putting all these things together, | 21:43 | |
and to make a long story very short, | 21:46 | |
perhaps a little bit too short, | 21:48 | |
I summarize the matter in the following way. | 21:50 | |
We have a surplus on private current account. | 21:54 | |
It was improving from 1959, when the dollar | 21:59 | |
was in desperate disequilibrium, | 22:04 | |
until about 1964 or 1965, when the Vietnam war accelerated | 22:07 | |
and when we crashed into the ceiling of full employment | 22:12 | |
and into incipient creeping price inflation. | 22:16 | |
It has since deteriorated so that we | 22:21 | |
scarcely have a positive surplus on a private account. | 22:24 | |
But even in our palmiest days of 1964, | 22:31 | |
in my judgment, it was not a big enough surplus | 22:35 | |
to offset the other legitimate items | 22:38 | |
in the basic balance of payments, | 22:42 | |
namely, in a regime of freedom, | 22:43 | |
the amount of long-term investment | 22:47 | |
which American corporations wanted to do abroad, | 22:49 | |
and the legitimate security needs voted by Congress. | 22:53 | |
Now, I'm not going to express an opinion | 22:58 | |
as to whether I like the Vietnam War | 22:59 | |
or don't like the Vietnam War. | 23:01 | |
I happen not to like it. | 23:03 | |
But it is a war which has been legitimatized | 23:05 | |
by Congressional vote, and it will be terminated | 23:10 | |
by legitimate Congressional vote. | 23:13 | |
And in the balance of payments, its expenditures | 23:16 | |
do add to the basic disequilibrium. | 23:17 | |
Abraham Lincoln used to be asked how tall a man should be, | 23:23 | |
and he always gave the answer- | 23:27 | |
I mean how long a man's legs should be, | 23:28 | |
and he always gave the answer, | 23:31 | |
"Long enough to reach the ground." | 23:33 | |
When I'm asked how big the balance | 23:34 | |
on private current account should be, | 23:37 | |
I say it must be long enough to reach the ground. | 23:38 | |
That is, it must be big enough to offset the other items in | 23:43 | |
the basic balance of payments, private foreign investment, | 23:47 | |
and government Cold War security expenditures. | 23:50 | |
Looked at from that viewpoint, | 23:56 | |
our legs are not nearly long enough. | 23:58 | |
The dollar is, in my judgment, overvalued. | 24:00 | |
This has been papered over, as you know, | 24:03 | |
by a recent flow of hot money, or volatile money, | 24:05 | |
into the New York stock market, | 24:11 | |
that has been helped along by the troubles in Europe, | 24:13 | |
although this process antedated | 24:17 | |
the Paris University riots and the general strike | 24:19 | |
and antedated the invasion of Czechoslovakia. | 24:23 | |
I think that this papering over will last for some time. | 24:26 | |
But make no mistake about it, I do not think | 24:31 | |
we are in basic balance, and therefore I am | 24:34 | |
looking forward to and welcoming conversations | 24:39 | |
in public and behind the scenes for more basic reforms | 24:44 | |
in our international balance of payments. | 24:49 | |
More about those basic reforms later. | 24:51 | |
- | Thank you very much, Professor Samuelson. | 24:54 |
If you have questions or comments or suggestions | 24:57 | |
or topics you'd like discussed in this series, | 25:00 | |
please send them to Instructional Dynamics Incorporated, | 25:02 | |
166 East Superior Street, Chicago 60611. | 25:06 |
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