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- | Welcome once again as MIT Professor, Paul Samuelson, | 0:02 |
discusses the current economic scene. | 0:05 | |
This biweekly series is produced | 0:07 | |
by Instructional Dynamics Incorporated and was recorded | 0:09 | |
January 24, 1972. | 0:12 | |
- | The most frequent question that I am asked now | 0:16 |
about the economic scene has to do with | 0:20 | |
the aftermath of the currency agreements | 0:24 | |
reached in Washington in December. | 0:29 | |
There is a veritable war of nerves now taking place. | 0:33 | |
The price of free gold in the Zurich markets | 0:40 | |
moved early in January up to more than $46 an ounce. | 0:43 | |
The expected reflux of speculative dollars, | 0:52 | |
dollars for example held in Germany in the form | 0:58 | |
of Marks in the successful hope of profiting | 1:03 | |
from appreciation. | 1:07 | |
Dollars primarily by multinational corporations | 1:09 | |
but in part by individual speculators. | 1:13 | |
Those dollars had been expected to be returning | 1:17 | |
once the agreement was reached in great amounts | 1:21 | |
in the billions of dollars; whereas, the fragmentary | 1:26 | |
evidence now available suggests that perhaps only | 1:29 | |
a billion of those dollars will come back. | 1:33 | |
What do those dollars know that we don't know? | 1:35 | |
Why are they holding off? | 1:38 | |
I have even been getting transatlantic telephone calls | 1:43 | |
frantically asking for any insight in this matter. | 1:47 | |
The big question is, "Are the currency | 1:54 | |
agreements, the parity adjustments, reached at | 1:59 | |
the Smithsonian around December 18th working? | 2:02 | |
Or are they already coming apart? | 2:07 | |
Are we in a world recession? Will it get worse? | 2:11 | |
Was the amount of dollar depreciation enough? | 2:19 | |
Is the medicine going to work or was it insufficient? | 2:22 | |
And you will not be surprised to hear | 2:28 | |
at the same time that I am being asked | 2:33 | |
whether the dollar depreciation was sufficient, | 2:34 | |
I am also getting questions from intelligent opinion, | 2:38 | |
here and abroad, asking, in view of | 2:42 | |
a possible world recession, in view | 2:46 | |
of a possible necessity for Germany and Japan and Italy | 2:49 | |
to take domestic expansionary measures | 2:53 | |
that will worsen their balance of payments. | 2:58 | |
Is it possible that the dollar will have | 3:01 | |
to be revalued in an upward direction? | 3:03 | |
Was the currency depreciation agreed upon | 3:07 | |
in Washington too much of a good thing? | 3:12 | |
Well let me give you my opinion. | 3:17 | |
First, I don't think that there is any question | 3:24 | |
but that much of the world is now in a growth recession. | 3:27 | |
A good deal of the slow down that was discernible | 3:35 | |
in countries like Germany and Italy and Japan, | 3:39 | |
had taken place before August 15th. | 3:45 | |
Before the so called Nixon talk. | 3:48 | |
Indeed, some of those countries looked to be | 3:53 | |
coming out of their recession and the fairly | 3:56 | |
active forecast, for example, from Japan | 3:59 | |
suggested that looking ahead to the next fiscal year | 4:04 | |
that Japan would begin to move back toward | 4:08 | |
her targets of phenomenally rapid real growth. | 4:11 | |
Naturally, the Nixon talk had it's toll abroad. | 4:17 | |
The fact that the dollar was floating downward | 4:24 | |
and those currencies were floating upward | 4:29 | |
would tend to be a shock to business | 4:32 | |
expectations in those countries. | 4:36 | |
The fact that no agreement was reached | 4:39 | |
the mere fact of floating even though it was | 4:42 | |
primarily dirty floating and not clean floating | 4:46 | |
scared business men. | 4:50 | |
I reported in an earlier tape | 4:54 | |
that the survey of business men's expectations | 4:57 | |
in Japan took a more violent swing toward the downside | 5:04 | |
than I have ever seen recorded in | 5:08 | |
any such similar survey, where it be in | 5:11 | |
Japan or whether it be in any other country | 5:13 | |
in the modern epoch. | 5:16 | |
Secretary Connally, toward the end of the period | 5:20 | |
of uncertainty, ws not helping matters | 5:24 | |
by going around the world and in a recalcitrant way | 5:26 | |
giving ultimata as to the amount of the American | 5:30 | |
trade balance improvement which the United States would | 5:36 | |
insist upon before changing the import tax surcharge. | 5:40 | |
And so, psychologically, and we have to give something | 5:50 | |
to confidence, there was a worsening in | 5:55 | |
the international business situation in the interval | 5:57 | |
from August 15th to December 18th. | 6:03 | |
Now we have a little more than a month since | 6:06 | |
December 18th. | 6:09 | |
What is the pattern of experience developing? | 6:10 | |
I think it's fair to say in that month that | 6:15 | |
the general pace of business abroad | 6:22 | |
in, let us say, Germany, Italy, Japan | 6:25 | |
and let us also add France now | 6:28 | |
has shown some deterioration. | 6:31 | |
You can particularly see this in orders, | 6:34 | |
not only export orders but in capital goods orders | 6:36 | |
in intentions to invest. | 6:40 | |
Can this be the result of a correct perception | 6:45 | |
that the dollar depreciation was either too great | 6:51 | |
in December or too little. | 6:59 | |
I think not, in fact, per the nature of the case | 7:02 | |
that cannot be so. No experience could possibly | 7:06 | |
have accumulated in one month which could | 7:10 | |
add or subtract one jot from anyone's expectations | 7:14 | |
on these matters. | 7:19 | |
Moreover, it is a great mistake to think that | 7:23 | |
there are some knowledgeable speculators in Zurich, | 7:28 | |
or those who are free to speculate | 7:32 | |
in the London gold market, who know something | 7:35 | |
that we don't know and who are onto a good thing | 7:38 | |
and therefore are accumulating long positions in gold. | 7:42 | |
Quite the contrary, in the first place | 7:48 | |
as we knew in Wall Street before the end | 7:51 | |
of November before the Thanksgiving bottoming out | 7:56 | |
of Wall Street that there was no sophisticated | 7:59 | |
knowing opinion in Wall Street which saw trouble | 8:03 | |
ahead for 1972 for the American economy | 8:07 | |
sooner than knowledge of that trouble was available | 8:12 | |
to the government and to the general group | 8:16 | |
of informed experts. On the contrary, | 8:21 | |
the market then was filled with nameless dread | 8:24 | |
and as it went down, down, down it, for a short time | 8:28 | |
of course, achieved a self fulfilling prophecy. | 8:33 | |
So it is with the gold market. | 8:38 | |
What makes the free market in Zurich tick? | 8:40 | |
What makes it move up and what makes it move down, | 8:44 | |
is, you must understand, not primarily | 8:47 | |
the demand curves of dentists who use gold for inlays, | 8:52 | |
the demand curve of jewelers who use gold | 8:57 | |
for wedding rings and various decorative jewelry, | 9:00 | |
it is not the demand curve for relays in electronic circuits | 9:04 | |
nor is it primarily the supply conditions as determined | 9:12 | |
by how much gold can be recycled of reclaimed | 9:17 | |
or as determined by the Russian gold mines | 9:22 | |
nor even the supply commissions of South African gold. | 9:27 | |
The fundamental forces of supply and demand | 9:34 | |
that operate upon a typical commodity | 9:36 | |
whether it be cocoa or copper or sugar or corn | 9:38 | |
or wheat, these are necessarily in the back ground. | 9:43 | |
We are much more in a situation like that | 9:48 | |
of the American and London silver market. | 9:51 | |
These are speculators markets. These are markets that | 9:55 | |
have a heavy overhang of supplies that are held | 9:59 | |
only for the purpose of a price rise. | 10:06 | |
Now it is very important that there be a rumor | 10:11 | |
in Zurich which says that the South Africans | 10:15 | |
are refusing to sell gold and are withholding gold. | 10:18 | |
That rumor, if believed, sends up the price of gold. | 10:22 | |
It so happens that the South Africans have denied | 10:25 | |
that the flow of new gold that is coming from | 10:29 | |
their mines has been diverted in any significant | 10:31 | |
manner. I conclude, therefore, that when informed opinion | 10:35 | |
begins to achieve evidence on the question | 10:44 | |
of whether the dollar currencies, depreciation | 10:47 | |
that were agreed upon and appreciations are wrong, | 10:52 | |
are inadequate, are more than adequate. | 10:57 | |
It will not come to us from that particular gold market | 10:59 | |
and so I really attach no significance to the | 11:04 | |
daydreaming of the avaricious speculators in the market. | 11:08 | |
Let me not be misunderstood, it is possible | 11:15 | |
that 5 years from now the price in the free markets | 11:19 | |
could be twice $35 and ounce, twice $38 dollars and ounce, | 11:23 | |
$76 dollars an ounce. That is certainly | 11:30 | |
a possibility. But I say that what determines | 11:32 | |
the fate of the currency agreement reached in Washington | 11:38 | |
will not be resolved, will not be know at all | 11:44 | |
for a period of two or three years | 11:47 | |
because it is a well established fact | 11:50 | |
of international finance that even if the medicine | 11:52 | |
of exchange rate appreciation is going to do it's work | 11:59 | |
and is going to do it's work perfectly to restore | 12:02 | |
equilibrium in the balance of payments | 12:05 | |
to the deficit country and correct the chronic surpluses | 12:07 | |
of this equilibrium of the previously overvalued | 12:12 | |
currencies, that medicine must take years to work | 12:17 | |
and one months evidence is adds nothing to the jury | 12:23 | |
that is waiting to make a decision as to | 12:30 | |
whether the depreciation was too much or too little. | 12:33 | |
What we can say is this, "If there had to be | 12:37 | |
a stabilization of currencies against continued | 12:41 | |
floating, no responsible jury of experts | 12:43 | |
in international finance could have agreed | 12:48 | |
that the dollar should have been depreciated more | 12:52 | |
relative to the Yen, relative to the Mark, | 12:56 | |
relative to the average of the other currencies | 13:00 | |
than was agreed upon in Washington. | 13:02 | |
Indeed, the bulk of the so called international experts | 13:07 | |
have tended to be optimists in technical economics | 13:12 | |
called elasticity optimists, people who believe | 13:18 | |
that a rather small depreciation of the dollar | 13:23 | |
ought to be enough, given time, | 13:27 | |
to achieve equilibrium once again. | 13:30 | |
Even a elasticity pessimist, relative pessimist, | 13:37 | |
like myself, must agree that the German and | 13:41 | |
the Japanese rather handsomely are giving this whole | 13:46 | |
operation a chance. And so I repeat, | 13:50 | |
if the experiment turns out to be a failure, | 13:56 | |
we shall only learn about that gradually | 14:00 | |
over the months and years ahead. | 14:03 | |
What is it that we should be looking out for | 14:06 | |
in judging how the experiment works out? | 14:09 | |
First, if the depreciation was not enough | 14:13 | |
it would show itself by a very slow | 14:18 | |
improvement in the US balance of payments. | 14:22 | |
It would show itself in the dollar being | 14:25 | |
chronically and not trasiently at the bottom | 14:28 | |
of the widened range permitted for its fluctuation | 14:33 | |
relative to other currencies or to put | 14:38 | |
the matter the way it will look abroad, | 14:41 | |
it will show itself by the principle currencies | 14:44 | |
of the world freely floating to the upper point | 14:47 | |
of their permitted range. Their two and a quarter | 14:51 | |
percent permitted range and if this persists | 14:53 | |
month after month, and really, year after year | 14:59 | |
then people in Zurich and in New York and in London | 15:05 | |
will begin to have rational reasons for thinking | 15:09 | |
that perhaps the depreciation was not enough. | 15:13 | |
I hope before then, we shall have got on to | 15:16 | |
the undecided question in Washington of what to do | 15:20 | |
about the convertibility of the dollars that | 15:23 | |
continue to go abroad and which we know | 15:26 | |
must continue to go abroad even if the medicine | 15:28 | |
is working and perhaps more importantly by then | 15:30 | |
we shall have agreed on some measure | 15:35 | |
of structural reform of the Bretton Wood System | 15:42 | |
towards a gliding band. Towards some kind of crawling peg. | 15:45 | |
And I would not consider it a defeat | 15:51 | |
for anyone in the world if at the end | 15:56 | |
of three years, it was decided that the Washington | 16:00 | |
agreement required still further gradual flexibility | 16:06 | |
of the exchange rate up or down. | 16:14 | |
If for example, under a gliding band arrangement, | 16:17 | |
let me just spell that out, that's an arrangement | 16:23 | |
whereby the existing parity can be changed | 16:26 | |
by one percent or two percent so that the whole band, | 16:32 | |
two and a quarter percent above and two and | 16:36 | |
a quarter percent below, can reform itself | 16:38 | |
one or two percent lower. If the dollar should move | 16:42 | |
further towards depreciation, that would not be | 16:49 | |
a sign that the December agreement had been wrong, | 16:53 | |
it would be a sign of how important the December | 16:58 | |
agreement was because think how badly things | 17:01 | |
would have worked themselves out if we had continued | 17:05 | |
to peg the dollar at the old level. | 17:08 | |
This enables me to turn to the opposite fear. | 17:13 | |
If there is recessionary tendencies abroad, | 17:17 | |
and if as I believe, in the age after Keynes, | 17:21 | |
the countries abroad know what to do about it | 17:25 | |
and will have the will to do it needed to do about it. | 17:27 | |
Namely, to engineer domestic monetary expansion | 17:31 | |
and if they all do it simultaneously, | 17:35 | |
they will not run balance of payments deficits | 17:37 | |
against each other, although it can be expected | 17:39 | |
that they will begin to run smaller surpluses | 17:44 | |
against the United States. | 17:47 | |
If it should turn out that the measures needed | 17:51 | |
to restore prosperity abroad were so great | 17:54 | |
that the surpluses abroad against the dollar | 17:57 | |
were to over shoot and move to deficits | 18:02 | |
then that would show itself but it will only | 18:05 | |
show itself after months and even years in which | 18:08 | |
the foreign currencies float downward | 18:12 | |
no transiently but chronically down at the lower | 18:16 | |
points in their band and if three years from | 18:20 | |
now it should turn out that we did overdo things | 18:23 | |
in dollar depreciation in Washington | 18:28 | |
and if we have a systematic gliding band | 18:30 | |
and if it should be that the dollar | 18:33 | |
would be revalued upward relative to other | 18:36 | |
currencies gradually, again I would not think this | 18:38 | |
is any reflection upon the wisdom of those people | 18:42 | |
who met and decided at Washington. | 18:44 | |
I think therefore that the message I can | 18:49 | |
give you today is a fairly cheerful one. | 18:53 | |
The jitters in the international market | 18:57 | |
are mostly jitters. They are mostly nameless | 19:00 | |
dreads. When a United States treasury department | 19:04 | |
official denies that we have in mind | 19:08 | |
to double the price of gold. | 19:10 | |
You may say to yourself as a weary and sophisticated | 19:13 | |
man of the world, "Oh that's what those fellows | 19:15 | |
always say. Right up to the moment of depreciation | 19:17 | |
they can lie on these matters." | 19:19 | |
I will not deny that convention of international finance. | 19:21 | |
But I say to you, and if my evidence is worth anything | 19:27 | |
that no jury of informed inside experts | 19:32 | |
think that that denial by the treasury | 19:37 | |
is anything but the truth and there have | 19:39 | |
been a lot of earlier occasions when I have thought | 19:41 | |
that Anderson papers and Ellsberg papers | 19:43 | |
are correctly revealing to us that governments | 19:47 | |
are not in their public utterances | 19:50 | |
sticking closely to the truth. | 19:53 | |
It is a hundred to one bet that the United States | 19:56 | |
will not in the next year, change the official price | 20:01 | |
of gold at all and if you want to be a sucker | 20:05 | |
and take one to a hundred bets with your valuable | 20:08 | |
money then I doubt that you will receive | 20:11 | |
much benefit from listening to takes like this. | 20:15 | |
It's only at a later stage, two or three years from now, | 20:18 | |
when the kinds of signs that I have been discussing | 20:22 | |
with you develop fully that it could be that | 20:25 | |
we would learn the truth of the hypotheses | 20:30 | |
that underlie some of these particular rumors. | 20:34 | |
Now I don't want to be a Pollyanna on the world | 20:38 | |
recession. | 20:41 | |
The rest of the world in a mixed economy | 20:44 | |
is certainly due to have recessions at one | 20:48 | |
time or another and the groundwork has been | 20:53 | |
laid for a pretty good one and there is no | 20:56 | |
particular reason why the Germans should snap back | 20:59 | |
from this one in the remarkable fashion in which | 21:02 | |
they have snapped back from a number of earlier ones. | 21:06 | |
So I should like to give you soft words | 21:10 | |
and soothing syrup that prosperity is just around | 21:14 | |
the corner abroad. | 21:17 | |
I will merely conclude with the observation | 21:18 | |
that we do live in the age after Keynes, | 21:25 | |
we do have the economic knowledge | 21:28 | |
and what is more important, in all of these | 21:31 | |
countries, the countries of continental Europe and Japan, | 21:34 | |
we are essentially in populist democracies. | 21:40 | |
We are in democracies which have electorates that will | 21:45 | |
not stand for chronically high amounts of unemployment. | 21:49 | |
We have electorates which are much more likely | 21:55 | |
to countenance and contrive creeping inflation | 21:58 | |
than electorates who will countenance deepening | 22:03 | |
economic slumps and so having the knowledge | 22:07 | |
and having the will to use the knowledge, | 22:11 | |
I'd think that we must bet that the forces | 22:13 | |
of government will be used abroad to counter | 22:20 | |
any deepening recession and that is why, I say, | 22:25 | |
that anyone who goes to Lloyd's of London and wishes | 22:30 | |
to pay a heavy price for an insurance premium | 22:33 | |
against a repeat of 1929 to 1933, anyone | 22:35 | |
who has nightmares of the failure of | 22:42 | |
the Creditanstalt Bank in Austria | 22:46 | |
precipitating a universal world monetary slump | 22:48 | |
and thinks that we are ready to have a replay | 22:55 | |
of that in the 1970s, I say that 40 years have gone by | 22:58 | |
and in those 40 years the fundamental background | 23:01 | |
odds have changed. | 23:07 | |
Any prudent man who is trying to forecast the future | 23:09 | |
who is trying to husband his capital resources | 23:13 | |
had better go with the odds and not go against the odds. | 23:16 | |
- | If you have any comments or questions for | 23:20 |
Professor Samuelson, address them to | 23:22 | |
Instructional Dynamics Incorporated | 23:24 | |
166 East Superior Street | 23:26 | |
Chicago, IL 60611 | 23:28 |
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