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- | Welcome again, as MIT professor Paul Samuelson | 0:02 |
discusses the current economic scene. | 0:04 | |
This bi-weekly series is produced | 0:06 | |
by Instructional Dynamics Incorporated | 0:08 | |
and was recorded on September 21, 1970. | 0:10 | |
- | This is very good time to talk | 0:14 |
about the international situation. | 0:16 | |
Once a year, in September, the International Monetary Fund | 0:19 | |
and its sister organization the International Bank. | 0:24 | |
has their annual meetings, | 0:28 | |
Usually, every other year, I guess it is, | 0:30 | |
those meetings are held in Washington. | 0:33 | |
But this is one of those other years and this year, | 0:35 | |
the meetings are being held in Copenhagen. | 0:39 | |
Just as I'm now talking, people in Copenhagen are gathered | 0:42 | |
to discuss the international balance of payments | 0:48 | |
situation of the various companies of the world. | 0:53 | |
Actually, such discussions have been going on for some time | 1:00 | |
because for a week or two before the Copenhagen meetings, | 1:04 | |
there was a good deal of activity in Basel. | 1:08 | |
Once a month at the Bank of International Settlements, | 1:12 | |
there are private and closed meetings of central bankers, | 1:15 | |
our team from the United States, from the Federal Reserve. | 1:22 | |
Governor Dewey Daane, I believe, | 1:28 | |
is usually our representative | 1:29 | |
under Secretary Volker from the U.S. Treasury. | 1:32 | |
Sometimes if the subjects are very hot and pressing, | 1:38 | |
Secretary of Treasury Kennedy and I dare say that | 1:43 | |
Chairman of the Federal Reserve, | 1:47 | |
Arthur Burns, would also be welcome. | 1:48 | |
Now, September is always a very good time for stop taking | 1:52 | |
in the international field because it's then, if ever, | 1:57 | |
that changes are made in our written, unwritten constitution | 2:02 | |
of how we run matters. | 2:06 | |
So, let's first look back at the past year | 2:09 | |
and then, let's look at what is being discussed | 2:15 | |
right now in Copenhagen and then try to make some guesses | 2:18 | |
about what's in store for us for the coming year. | 2:22 | |
In the international domain, I think you have to say, | 2:30 | |
that this last year has been a quiet one. | 2:32 | |
I have a card here from one of our subscribers. | 2:37 | |
It came a couple of months ago | 2:40 | |
but I didn't have a chance to speak to it. | 2:42 | |
His question is, is there a chance | 2:47 | |
of a worldwide money crisis? | 2:48 | |
That's a very broad question, it's very easy to answer. | 2:52 | |
Yes, of course, there's a chance of a worldwide money crisis | 2:55 | |
it could have broken out anytime during this past year | 2:59 | |
and it can still break out in the future. | 3:03 | |
Nevertheless, in the genuine sense of the word, | 3:07 | |
it did not occur in the last year. | 3:10 | |
We have had an appreciation of the mark by 9% | 3:14 | |
so that instead of one mark being worth about 25 cents, | 3:21 | |
it's now worth about 27 and a third cents. | 3:25 | |
That took place at the time of the German election | 3:28 | |
and just prior to the election, | 3:35 | |
it created a great deal of jitters but the outcome, | 3:37 | |
in my judgment, has been very good thing. | 3:42 | |
Namely, an appreciation of the mark, relative to the dollar | 3:45 | |
and relative to the pound. | 3:50 | |
A strong currency that has been in surplus and which, | 3:52 | |
I would have to regard as undervalued, | 3:56 | |
was appreciated relative to a weak currency, the dollar, | 4:00 | |
which I have to regard, as overvalued. | 4:07 | |
Now, I have to explain the sense in which that's the case. | 4:10 | |
Well, that particular exchange rate | 4:15 | |
change was definitely in the right direction | 4:19 | |
and we are better off today for it's having taken place. | 4:25 | |
We had, not so long ago, a French depreciation, | 4:29 | |
a depreciation of the franc and I have to regard that change | 4:33 | |
as having been in the right direction | 4:37 | |
because France has become a high-cost country, | 4:40 | |
subsequent to the student uprising a couple years ago, | 4:46 | |
and subsequent to the general strike, | 4:50 | |
and subsequent to all the commotions which caused | 4:51 | |
General de Gaulle to retire from public life. | 4:55 | |
There was upward pressure on costs in France | 4:59 | |
and there would be, in my judgment, a greater disequilibrium | 5:03 | |
in the French balance of payments | 5:09 | |
had she not wisely finally decided | 5:11 | |
to depreciate the franc somewhat. | 5:15 | |
Course, that's not all, | 5:20 | |
we have had a change of the Canadian dollar. | 5:21 | |
Our great neighbor to the north of us, has once again, | 5:27 | |
permitted the Canadian dollar to float. | 5:32 | |
This is perhaps in formal defiance of the rules | 5:35 | |
of the International Monetary Fund but it won't be | 5:38 | |
the first time that the Canadians | 5:41 | |
have been in defiance of the letter of those rules. | 5:44 | |
The result has been that the Canadian dollar | 5:48 | |
which was more or less stabilized at around 92 or 93 cents | 5:51 | |
to the American dollar. | 5:58 | |
An American tourist could always go to Canada | 6:01 | |
and pay his tip, so to speak, out of the premium | 6:04 | |
of the American dollar over the Canadian dollar. | 6:09 | |
Well, the Canadians, once they found themselves | 6:13 | |
in a strong surplus position, decided that they were | 6:17 | |
unwilling to accumulate American dollars | 6:22 | |
that kept flowing in at a tremendous rate | 6:24 | |
at the old 92 centerity. | 6:28 | |
So, they suspended their stabilization operations | 6:32 | |
in which the government would automatically | 6:36 | |
both buy and sell American dollars | 6:38 | |
for Canadian dollars at the official parity | 6:41 | |
with the result that the Canadian dollar has risen | 6:45 | |
and the Canadians, presumably, are feeling the market out | 6:49 | |
to see where the Canadian dollar will settle down. | 6:56 | |
And if, I suppose, it does settle down, it's very likely | 7:00 | |
that the Canadians will then declare a new parity. | 7:04 | |
Then, no longer be in defiance | 7:09 | |
of the Bretton Woods requirements which are that | 7:11 | |
each nation shall have, for long periods of time, | 7:15 | |
relatively inflexible of parity. | 7:19 | |
One last source of possible exchange rate instability | 7:25 | |
has been in connection with the pound. | 7:32 | |
This, of course, is a very old chronic story. | 7:35 | |
The pound, much of the time, is an object of suspicion | 7:38 | |
and is under some pressure, | 7:43 | |
speculative and precautionary pressure. | 7:48 | |
This year has been no exception. | 7:52 | |
As a matter of fact, with the surprising victory | 7:54 | |
of the Tory Government, | 7:58 | |
which had not been predicted by most of the polls. | 7:59 | |
And with the Tory government | 8:03 | |
beginning to have difficulties, renewed difficulties, | 8:05 | |
accentuated difficulties with organized labor | 8:10 | |
in Great Britain, longshoreman and wildcat strikes, | 8:13 | |
a tremendous increase in wage rates in Great Britain, | 8:19 | |
there naturally began to be considerable anxiety | 8:23 | |
as to whether the $2.40 parity of the pound | 8:26 | |
could be maintained and quite a lot of speculators | 8:29 | |
began to sell the pound short. | 8:32 | |
I was in England a week ago, week and a half ago now, | 8:36 | |
and while I was there, the London newspapers were blazing | 8:41 | |
with headlines because the Bank of England, very cleverly, | 8:46 | |
engineered a tremendous rise in the pound | 8:51 | |
with the foreign exchange market, | 8:53 | |
punishing, very severely, the bear raiders. | 8:55 | |
So, the bears have learned, once again, | 8:59 | |
that there's no one-way street to profit | 9:01 | |
and he who sells a currency short must be prepared | 9:04 | |
not only to be correct and to be a capital gains winner | 9:10 | |
but he must be prepared to have things go against him | 9:16 | |
and to incur very heavy capital losses | 9:19 | |
and the squeals of the short-sellers could be heard | 9:21 | |
all the way to Cambridge, England from London. | 9:25 | |
I, being in Cambridge, England at that time. | 9:29 | |
For the moment, it would appear, that the town | 9:32 | |
has weathered the speculative movement but to my mind, | 9:35 | |
there still has to be placed a big question mark | 9:43 | |
next to the pound as to whether | 9:47 | |
it is in long run equilibrium. | 9:49 | |
Particularly, if Prime Minister Heath is really going | 9:50 | |
to lead Britain into the counter market. | 9:54 | |
I think, a strong case can be made that England, | 9:59 | |
in a free trade relationship with the continental countries, | 10:04 | |
with France, Italy, Germany, Netherlands, so forth, | 10:09 | |
that the present parity of $2.40 cents is not a tenable one. | 10:14 | |
And that she would be much better armed | 10:23 | |
for a peaceful and profitable coexistence | 10:26 | |
with her colleagues in the common market | 10:30 | |
particularly, since all the advantage | 10:38 | |
of the last depreciation of the pound from 2.80 to 2.40, | 10:39 | |
seems to be in the process of being dissipated | 10:45 | |
by increases in wage costs in Great Britain. | 10:48 | |
So much for the dramatics in the foreign exchange markets, | 10:53 | |
what takes the headlines, let's look at the structure | 10:59 | |
of our present international financial system. | 11:04 | |
First, I would have to say that the two-tier gold system | 11:10 | |
has been working very well, very well indeed. | 11:13 | |
The price of gold has been hovering around $36 an ounce. | 11:18 | |
As the British got into trouble, | 11:23 | |
there was some flurry of increase in the free market, | 11:25 | |
that is, the Zurich market, the London market. | 11:30 | |
With a two-tier system, of course, | 11:34 | |
we have two separate prices of gold. | 11:37 | |
The official price of gold is $35 an ounce | 11:41 | |
and all transactions take place between the big ten, | 11:45 | |
between the hundred odd members of | 11:50 | |
the International Monetary Fund at this official price. | 11:52 | |
And as far as our monetary system is concerned, | 11:58 | |
that's the only price of gold that is at all meaningful. | 12:01 | |
I'd go farther and say that we have, in a very real sense, | 12:05 | |
begun to demonetize gold so that gold has no significance | 12:09 | |
for our monetary system, that's a slight overstatement | 12:13 | |
but it's in the right direction. | 12:16 | |
Alongside of this, of course, is the free market | 12:20 | |
and the free market has nothing to do, any longer, | 12:24 | |
with the monetary system. | 12:27 | |
The price of gold in Zurich has no more to do with | 12:30 | |
the International Monetary Fund now than the price | 12:34 | |
of tea in Solang, or the price of wheat, | 12:39 | |
which has been acting up sympathetically | 12:43 | |
with the corn blight on the Chicago board of trade, | 12:46 | |
or than with the price of cocoa which has been | 12:50 | |
in some recovery despite a few financial machinations | 12:55 | |
and peccadilloes of the | 13:02 | |
United Bank of California's Swiss branch. | 13:06 | |
The only people who really are concerned with the price | 13:11 | |
of gold are dentists, and jewelers, and the mafia, | 13:14 | |
and continental hoarders in countries | 13:23 | |
where it's legal to hoard gold, | 13:27 | |
and in the underdeveloped part of the world, for example, | 13:30 | |
in the Middle East, and in the Far East, | 13:34 | |
there is a steady private demand to hoard gold. | 13:38 | |
The speculators who have had a very long gold position | 13:47 | |
were hopeful that what has been around | 13:51 | |
35 and 36 dollars an ounce would run up to | 13:53 | |
40 or 50 dollars an ounce and bail them out | 13:59 | |
from the speculative position. | 14:01 | |
The South Africans, too, have finally come down to Earth | 14:05 | |
as a principal miner of gold and as a special interest group | 14:10 | |
interested in having the price of gold be raised, | 14:18 | |
both officially and unofficially. | 14:20 | |
South Africa has had a rather disappointing year. | 14:23 | |
Finally, for constitutional reasons and for reasons | 14:30 | |
of compromise, the International Monetary Fund | 14:33 | |
has agreed to let South Africa sell newly mined gold | 14:36 | |
to the officials here at the official price, | 14:42 | |
even though South Africa may, in the same year, be selling | 14:47 | |
gold in the unofficial tier, the so called free market, | 14:54 | |
at whatever price that gold will fetch. | 14:58 | |
This is a privilege extended to South Africa | 15:01 | |
and I think, to no other country. | 15:04 | |
It is a privilege, it's a compromise | 15:08 | |
but the arrangement has been made that South Africa | 15:12 | |
can only sell ... | 15:17 | |
South Africa's really been bailed out because | 15:23 | |
if she could not sell at all to the official tier | 15:25 | |
at any price, and had to sell it all on the free market, | 15:28 | |
it's very possible that the free market price | 15:32 | |
could begin to sink below 35 dollars an ounce. | 15:35 | |
That's the eventuality, I may say, which my dentist | 15:38 | |
would not regret, nor perhaps, would my jeweler, | 15:41 | |
and I would not regret it. | 15:48 | |
But in any case, in order to keep that from happening, | 15:50 | |
South Africa is very anxious to have a second place | 15:55 | |
to sell its gold, official tier, | 15:59 | |
and it does have that right. | 16:00 | |
Well, it has had to use that right to keep the price | 16:02 | |
of gold from falling in the free market | 16:05 | |
and I think the South Africans are very disappointed people. | 16:10 | |
Along with them, the great number of speculators | 16:14 | |
in gold stocks and in various gold coin rather positions. | 16:20 | |
Some of these speculators, if they're Americans, | 16:27 | |
are actually breaking the law and now that we're getting | 16:29 | |
more and more reporting, some of them are going to end up | 16:33 | |
in the headlines and some of 'em are gonna end up in jail. | 16:36 | |
But there's nothing illegal about buying | 16:39 | |
homestead gold mining stock, or Canadian gold stock, | 16:44 | |
or shares in South Africa, and a number of people | 16:49 | |
have been buying those very heavily. | 16:54 | |
There's a regular clack which tries to talk up the price | 16:56 | |
of gold all the time, I get some of the monthly letters. | 17:01 | |
Whenever I write on this subject, I get irate correspondence | 17:04 | |
from people criticizing me for not getting on the bandwagon. | 17:07 | |
Well, I don't blame these chaps because that's where | 17:11 | |
their chips have been placed and they're like any lobbyist | 17:15 | |
they would like to make a good thing out of it | 17:22 | |
but I'm afraid they're unlikely to. | 17:25 | |
Gold mine stock has not been a very good investment. | 17:28 | |
For years and years, it's return has been less than that | 17:35 | |
of other stocks. | 17:40 | |
I'd say, the best you could say for gold mining stock | 17:41 | |
is that such shares tend to move against the market. | 17:43 | |
If the mark and lyra goes up a lot then gold shares | 17:48 | |
don't go up a lot but by the same token, | 17:52 | |
if the market in New York goes down a lot, | 17:55 | |
gold shares don't tend to share in the fall, | 17:57 | |
they may actually move against the market. | 17:59 | |
Which makes them, in a very large portfolio, | 18:01 | |
suitable for hedging even at some sacrifice, | 18:04 | |
they reduce risk but that's the best | 18:08 | |
that can be said for them. | 18:10 | |
Let me move on. | 18:12 | |
The two-tier gold system has worked out quite well. | 18:13 | |
The second great innovation in recent years, | 18:18 | |
the creation of paper gold. | 18:22 | |
The institution instituting special drawing rights | 18:25 | |
has worked, I would say, very smoothly this past year. | 18:30 | |
It's off to an excellent start. | 18:36 | |
There's a leading article in the Barron's, just today, | 18:39 | |
which seems to be very unhappy that there's not more trouble | 18:45 | |
in the international markets because the writer | 18:50 | |
of this editorial disapproves of paper gold, | 18:53 | |
and disapproves of almost everything | 18:56 | |
with the International Monetary Fund | 18:57 | |
and the authorities have been doing. | 18:59 | |
But the best that he can say is that, just you wait, Henry, | 19:01 | |
there's gonna be trouble ahead. | 19:07 | |
And he cannot actually point to real trouble. | 19:08 | |
The system is holding together quite well. | 19:11 | |
Now, the third and in some ways, most important reform | 19:16 | |
that we can hope for, and that is in the cards, | 19:22 | |
and that is under discussion, cycle and two-tier gold system | 19:26 | |
and aside from the increase in international liquidity | 19:30 | |
provided by the special drawing rights, | 19:33 | |
the so called paper gold. | 19:36 | |
The third great improvement would be | 19:37 | |
to get some kind of exchange rate flexibility | 19:41 | |
into our present monetary system. | 19:44 | |
The Bretton Woods arrangements, made in 1944 | 19:48 | |
in New Hampshire, we now can see, were fatally flawed by the | 19:52 | |
requirement, by the expectation, that exchange rates would | 19:57 | |
stay more or less inflexible over very long periods of time. | 20:02 | |
We now realize that this, in a world where innovations | 20:07 | |
are taking place in different countries at different rates, | 20:11 | |
when inflation and deflation take place domestically | 20:14 | |
at different rates, this is to invite | 20:19 | |
cumulative overvaluations of some currencies | 20:21 | |
and undervaluations of other currencies | 20:25 | |
leading ultimately to shrewd guesses | 20:27 | |
by speculators that the overvalue of currency | 20:30 | |
is going to break down as parity is going to fall. | 20:33 | |
And so, you have almost riskless speculative positions, | 20:35 | |
bear rates on that currency, and of course, | 20:38 | |
the bear raters are awarded for their pessimism, | 20:42 | |
their acumen because the more they sell the currency short, | 20:46 | |
once it's weak, the more they bring on | 20:50 | |
what they hope will happen. | 20:53 | |
We've seen this again and again, with respect to | 20:55 | |
many of the currencies of the world. | 20:58 | |
Well, it was a bad system. | 21:02 | |
Economists belatedly have gotten around to realizing that | 21:05 | |
you ought to try to introduce some kind of flexibility. | 21:10 | |
It is no secret that the U.S. authorities have finally | 21:13 | |
become converted in favor of some kind of flexibility. | 21:17 | |
It is also no secret that there are certain groups | 21:23 | |
on the continent who are still dragging their heels. | 21:25 | |
And what's true of an even larger group, | 21:28 | |
both in this country, in private finance and abroad, | 21:31 | |
is the concern as to how we get to flexibility. | 21:36 | |
A lot of people who believe we ought to get more flexibility | 21:39 | |
but can't see tactically how we'll get there without causing | 21:42 | |
an international currency crisis | 21:48 | |
while you're talking about it, while you're deliberating, | 21:50 | |
and debating over what shall be done. | 21:54 | |
Yet, I feel a little progress has been made | 21:57 | |
because we have, in Copenhagen, a 78-page | 22:00 | |
official document by the executive directors | 22:04 | |
of the International Monetary Fund. | 22:07 | |
These are the representatives | 22:10 | |
of all the principal countries. | 22:12 | |
They, in a 78-page paper, have come out for a modest caution | 22:15 | |
suggested approach to limit the flexibility. | 22:22 | |
They've ruled out freely floating exchange rates, | 22:26 | |
and I suppose, the times are not yet right for that. | 22:28 | |
They've ruled out any tremendous widening of the bands | 22:32 | |
around parity, let's say, to a 10% above and 10% below | 22:37 | |
parity, within which, the exchange rates would be free | 22:43 | |
to fluctuate according to supply and demand and to | 22:47 | |
adjust flexibly within the spirit of the revised IMF rules. | 22:50 | |
But what they have come out in favor of | 22:58 | |
is some experimentation with the crawling peg, | 23:00 | |
in which many frequent limited in size | 23:05 | |
exchange rate adjustments can be made by a country | 23:11 | |
so that cumulatively, over a period of time, there will not | 23:14 | |
be an avalanche of speculation but you will gradually get | 23:17 | |
an alignment of an overvalue currency ceasing to be | 23:21 | |
overvalued and undervalued currencies ceasing to be | 23:24 | |
undervalued and a greater approach towards equilibrium. | 23:26 | |
They have come out in favor of a widened band, say, | 23:30 | |
to a 2 or 3% as against the present 1% around parity. | 23:38 | |
Within this widened band, there would be room | 23:42 | |
for some flexible exchange rate adjustments. | 23:45 | |
They have also suggested that there is a role and a place | 23:49 | |
for having a currency float and be determined by | 23:54 | |
free supply and demand without official intervention | 24:00 | |
in transition periods on the way to new parodies. | 24:03 | |
How, after all, as you go from one parity, | 24:06 | |
which is no longer appropriate, | 24:09 | |
to a new unknown appropriate parity, | 24:11 | |
do you find out what that proper level is? | 24:14 | |
You can only find out by letting the market tell you | 24:18 | |
and I think what the Canadians have been doing, | 24:22 | |
in which the Canadian dollar has risen | 24:24 | |
from 92 cents to 97, 98 cents, that that's the sort of thing | 24:27 | |
which the 78-page document exchange adjustments of the IMF | 24:32 | |
is beginning to speak on with some approval. | 24:37 | |
As I speak to you, I don't know what the final outcome | 24:42 | |
will be, whether any votes will be taken, | 24:44 | |
how the discussion will balance off, but I think | 24:46 | |
that we can say that there are definite signs of progress. | 24:51 | |
Finally, I should not end without speaking | 24:57 | |
of the fourth great problem, | 25:01 | |
which is endemic in international finance | 25:04 | |
and that is the problem of the dollar. | 25:07 | |
The dollar still remains, in my judgment, | 25:10 | |
an overvalued currency, our costs are too high. | 25:14 | |
There was a rumor in the Wall Street Journal, | 25:18 | |
picked up from Basel, by one of the Belgium financiers, | 25:20 | |
that the continent's getting very tired of taking on | 25:26 | |
our big dollar deficits. | 25:29 | |
They want to take on dollars and dollar securities in | 25:31 | |
some amounts but they don't want them in unlimited amounts. | 25:33 | |
So, this financial gentleman said, we're gonna get together | 25:38 | |
and we're gonna raise our currencies relative to the dollar, | 25:42 | |
no matter what the dollar says. | 25:45 | |
You would think that that was a threat, this something | 25:48 | |
that we in America want to resent and fight against | 25:50 | |
but actually, that's the opposite of the truth. | 25:55 | |
One only wishes that they would do that. | 25:58 | |
That is the ideal solution in which an appreciation | 26:00 | |
of the yen, an appreciation of the mark, | 26:04 | |
an appreciation of the currencies which are in surplus, | 26:06 | |
relative to the dollar which is in deficit, | 26:09 | |
should take place. | 26:13 | |
That would be exactly what the doctor ordered | 26:14 | |
and that sure won't happen but if that news came out | 26:16 | |
of Copenhagen, it's just the best news | 26:20 | |
that I could wish for. | 26:23 | |
Well, another time we will continue to discuss | 26:25 | |
why the dollar is overvalued. | 26:28 | |
What awful things we've been doing about it | 26:30 | |
and what better things we might better be doing about it. | 26:34 | |
- | Thank you, Professor Samuelson. | 26:38 |
If you have any questions or comments | 26:40 | |
for Professor Samuelson, address them to | 26:42 | |
Instructional Dynamics Incorporated, | 26:44 | |
166 East Superior Street, Chicago, Illinois, 606. | 26:46 |
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