Tape 5 - untitled
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- | Hello. | 0:02 |
Instructional Dynamics Incorporated welcomes you | 0:03 | |
to another in a series of commentaries | 0:05 | |
on the current economic scene. | 0:07 | |
Reporting to you again this week | 0:09 | |
will be one of the nation's leading economists, | 0:11 | |
Professor Paul Samuelson | 0:13 | |
of the Massachusetts Institute of Technology. | 0:15 | |
Professor Samuelson, I guess it's safe to say | 0:18 | |
that the big news on the economic front this week, | 0:21 | |
for the past week or so, has been | 0:24 | |
the problem of international finance. | 0:26 | |
- | Yes, indeed that is the big news, | 0:29 |
and we can be pretty sure that for many months to come, | 0:32 | |
international finance will be one | 0:37 | |
of the most important facets of the passing economic scene. | 0:40 | |
Let me therefore devote most of my remarks | 0:46 | |
today to this subject. | 0:50 | |
I don't think we're going to learn anything new | 0:54 | |
in the way of hard facts for some months to come, | 0:56 | |
and therefore this is a good time to devote ourselves | 1:01 | |
to analysis of the deeper economic forces | 1:07 | |
that are involved in analyzing and contemplating | 1:12 | |
the problem of exchange rates. | 1:17 | |
But before I go into analysis, let's just comment | 1:22 | |
upon the rather surprising decision | 1:28 | |
by General de Gaulle not to devalue the franc. | 1:32 | |
At the bond meetings of the Big 10, | 1:38 | |
there was a premature announcement | 1:41 | |
by Strauss, the German finance minister, | 1:43 | |
that the French would devalue moderately. | 1:48 | |
This was construed to be about 10%. | 1:54 | |
It appears that the French insiders | 1:57 | |
thought that there would be a devaluation. | 2:01 | |
The large sums of money which were ponied up | 2:05 | |
as a guarantee by the other nations of the Big 10 | 2:12 | |
and by the Bank for International Settlements | 2:16 | |
and by the International Monetary Fund | 2:18 | |
may have been premised upon the implicit belief | 2:20 | |
that the French would undertake a modern devaluation. | 2:24 | |
Well, we didn't reckon with the pride of the general. | 2:30 | |
The general has spoken. | 2:36 | |
He will not devalue. | 2:38 | |
This, I believe, will make his country's problem | 2:42 | |
a little bit more difficult, | 2:46 | |
but it doesn't change the fundamental nature of the problem, | 2:49 | |
and it is to that fundamental nature | 2:54 | |
that I would like to turn most of my remarks today. | 2:57 | |
Let's begin with the balance of payments. | 3:02 | |
A country exports. | 3:06 | |
We sell automobiles to the Belgians. | 3:09 | |
We sell wheat to the Indians. | 3:14 | |
A country imports. | 3:18 | |
We buy Scotch whiskey from abroad. | 3:20 | |
We buy French wines. | 3:25 | |
The difference between our exports | 3:29 | |
and our imports of merchandise | 3:31 | |
represents, of course, the so-called balance of trade. | 3:34 | |
Economists in the 18th century, | 3:40 | |
before the time of Adam Smith, | 3:45 | |
tended to speak of a favorable balance of trade, | 3:48 | |
meaning that a surplus of exports | 3:51 | |
over imports was a good thing. | 3:54 | |
This notion of the so-called mercantilists | 3:58 | |
is a very odd one, and it almost sets the truth | 4:03 | |
on its head, feet upward. | 4:09 | |
Looked at from the standpoint of welfare, | 4:12 | |
in a good society which is well-run | 4:15 | |
and which need have no massive unemployment problem, | 4:18 | |
in that good society where full employment | 4:24 | |
can be assured by suitable domestic measures, | 4:26 | |
surely it's a good thing to import rather than to export. | 4:31 | |
And one would think that a favorable balance of trade, then, | 4:36 | |
would be where a country somehow or other | 4:41 | |
manages to have a deficit on its balance of trade. | 4:44 | |
But of course, in a fundamental sense, | 4:52 | |
the balance of payments must balance out, | 4:55 | |
and let's examine that balancing out. | 4:59 | |
But before we do that, we must go beyond | 5:02 | |
the very simple picture of just merchandise items. | 5:05 | |
I spoke of a import by an American of a French wine. | 5:10 | |
That constitutes a so-called debit in international trade. | 5:17 | |
It uses up foreign exchange. | 5:23 | |
It contrasts with our export of bourbon whiskey, | 5:27 | |
which is a credit in international trade. | 5:32 | |
However, suppose that I go as a tourist, | 5:36 | |
as I am about to do in a week, to Paris, | 5:40 | |
and I spend my money there. | 5:47 | |
That will not show up as any merchandise import, | 5:49 | |
but it will show up as a so-called invisible item | 5:52 | |
in the current balance of payments. | 5:56 | |
I may say it's not very invisible. | 6:00 | |
It's a very visible thing. | 6:02 | |
So it has been the custom for more than a century now | 6:06 | |
to include in the current balance | 6:13 | |
more than merchandise items. | 6:15 | |
Just as exports of merchandise are credit items | 6:18 | |
and imports are debit items, | 6:21 | |
so purchase of tourists' accommodations abroad | 6:23 | |
are also debit items like imports. | 6:29 | |
If we buy insurance services from Lloyd's of London, | 6:34 | |
that is just like an import. | 6:38 | |
It is a debit item in the current balance of payments. | 6:41 | |
Contrariwise, if we provide shipping or insurance payments, | 6:45 | |
those are credit items. | 6:48 | |
So we must amplify the merchandise picture | 6:51 | |
by taking account of these particular | 6:55 | |
so-called invisible items. | 6:59 | |
But more than that, suppose that in the distant past | 7:01 | |
I bought some securities. | 7:07 | |
Let's say the Rank organization in England, | 7:10 | |
I bought some of their common stock. | 7:14 | |
They make movies, other things. | 7:16 | |
And I received dividends from England. | 7:18 | |
That provides the United States with foreign exchange | 7:22 | |
rather than using up foreign exchange. | 7:24 | |
It's exactly like an export in its impact upon us. | 7:26 | |
And so dividends received by Americans constitute part | 7:30 | |
of the invisible items in the current balance. | 7:36 | |
This has actually been a growing invisible item | 7:40 | |
because American firms in the past 20 years | 7:44 | |
have invested a lot of money profitably abroad. | 7:49 | |
Contrariwise, if Europeans own American stocks or bonds | 7:54 | |
and receive dividends or interest, | 8:00 | |
these are debit items in the balance of payments. | 8:02 | |
There are still other items. | 8:07 | |
I'm sticking now to the private sphere, | 8:09 | |
keeping the government accounts separate | 8:13 | |
just for the sake of the argument. | 8:15 | |
There are still other items. | 8:20 | |
Before 1923, when we clamped down on immigration, | 8:22 | |
a great number of people came to our shores. | 8:25 | |
If you went to the Italian district | 8:28 | |
in San Francisco or in New York, | 8:33 | |
you would find banks which advertised | 8:35 | |
that they remitted funds to relatives in Italy | 8:39 | |
conveniently for you. | 8:42 | |
These payments are just like imports. | 8:45 | |
They use up foreign exchange. | 8:47 | |
They are debit items, and they are put on the debit side | 8:49 | |
in the current balance of payments, | 8:52 | |
namely immigrants' remittances. | 8:53 | |
If Americans are charitable and give money | 8:57 | |
to care and to foreign charities year after year, | 9:03 | |
these are nice, steady, recurring items, | 9:07 | |
not one-shot operations, those too would be included | 9:09 | |
in the current balance as debit items | 9:15 | |
because, like imports, they use up foreign exchange. | 9:20 | |
If Americans receive charity, | 9:23 | |
we would count those as credits. | 9:27 | |
The net difference, of course, | 9:30 | |
in each of these items is the important thing. | 9:31 | |
Now, America typically, on private current account, | 9:35 | |
taking invisibles along with merchandise items, | 9:43 | |
does run a surplus on current account. | 9:50 | |
I almost said a favorable balance on a current account, | 9:57 | |
but of course I was there dropping into the nasty habit | 10:00 | |
of the 18th and 17th century mercantilists | 10:04 | |
who in part had things topsy-turvy. | 10:08 | |
Suppose that again we wash out | 10:14 | |
all foreign lending or borrowing | 10:17 | |
and America ran a favorable balance on current account, | 10:20 | |
that is, a surplus balance on current account. | 10:28 | |
How would that be paid for? | 10:31 | |
Because the total balance of payments taken as a whole | 10:33 | |
must balance out as a matter of definition. | 10:38 | |
Just as two and two makes four, | 10:41 | |
and four minus one makes three, | 10:44 | |
so the balance of payments is drawn up in such a way | 10:47 | |
that it must in principle be in balance | 10:52 | |
no matter how chaotic the disequilibrium. | 10:58 | |
On Black Tuesday, when foreign exchange markets | 11:02 | |
are going to hell, it still is true | 11:05 | |
that in some tautological sense, | 11:07 | |
the balance of payments must be | 11:09 | |
in formal arithmetic balance. | 11:12 | |
But that formal arithmetic balance | 11:17 | |
does not represent equilibrium. | 11:20 | |
It is not the goal that we seek. | 11:22 | |
There is one complication, however. | 11:27 | |
While I speak of the balance of payments, | 11:30 | |
I typically speak of the balance of payments | 11:32 | |
as reported by our governmental agency | 11:35 | |
given the task of recording those figures, estimating them, | 11:37 | |
and that is the Department of Commerce. | 11:44 | |
The Department of Commerce is by no means omniscient. | 11:46 | |
It does not have a microscope and a telescope | 11:49 | |
which enables it to see and measure | 11:53 | |
and record each transaction. | 11:56 | |
So as in all statistics, there exists due to imperfection | 11:58 | |
a residual item, which is called errors and omissions. | 12:05 | |
Now, what goes into errors and omissions? | 12:10 | |
Well, naturally we can only guess. | 12:12 | |
Certain criminal acts might lead to errors and omissions. | 12:17 | |
For example, acts of smuggling, | 12:22 | |
which avoid the customs officials, | 12:25 | |
but which do involve expenditures of money, | 12:28 | |
might be in errors and omissions. | 12:31 | |
Those are not terribly important. | 12:34 | |
I'm going to Paris next week. | 12:39 | |
As an American citizen, I have a perfect right | 12:44 | |
to stop in Switzerland on my way. | 12:46 | |
As an American citizen, I have a perfect right | 12:50 | |
to go this afternoon to my bank, | 12:52 | |
and if I have on deposit in my bank $10,000, | 12:55 | |
I have a right to go in there | 13:00 | |
and take it out in 10,000 one-dollar bills. | 13:02 | |
As an American citizen with an authentic passport, | 13:06 | |
I have a right to take those 10,000 dollar bills, | 13:10 | |
put them in my suitcase, and when I stop off in Switzerland, | 13:14 | |
let's say in Zurich or in Geneva, | 13:20 | |
I have a perfect right as an American | 13:25 | |
to put those 10,000 dollar bills into a Swiss bank account. | 13:27 | |
Now, I can put that into that Swiss bank account | 13:34 | |
under my own name, Paul A. Samuelson, | 13:39 | |
or I have a perfect right under Swiss law | 13:43 | |
and under American law, if I should wish to do so, | 13:47 | |
to put that in a Swiss bank account with a number, | 13:50 | |
and that number is known only to me and to the Swiss banker. | 13:57 | |
For many decades, that number would not | 14:05 | |
even be revealed to the Swiss government, | 14:10 | |
but now the Swiss government does have the right | 14:11 | |
and occasionally exercises that right | 14:13 | |
to go into the bank and ask, "Who is this number? | 14:16 | |
"To whom does it really belong?" | 14:22 | |
But this is a right which is used very sparingly. | 14:25 | |
So I can have a secret numbered account, | 14:29 | |
and that's perfectly legal. | 14:32 | |
Now, how does the Department of Commerce | 14:34 | |
ever learn about this transaction? | 14:39 | |
In the case I've given, I'm not sure | 14:43 | |
that the Swiss banks as a matter of courtesy, | 14:45 | |
but not revealing any particular names, | 14:50 | |
might not indeed report informally | 14:54 | |
to the American government | 14:59 | |
on the deposits received by Americans. | 15:02 | |
But if that is the case, | 15:04 | |
that's a fact of fairly recent duration. | 15:06 | |
And prior to a few years ago, at least, | 15:11 | |
our Department of Commerce did not | 15:16 | |
have that kind of information. | 15:17 | |
So errors and omission could represent | 15:20 | |
private capital transactions. | 15:23 | |
This would not be a current transaction | 15:27 | |
because mind you, I'm not drinking up Swiss wine | 15:29 | |
or eating Swiss cheese with this. | 15:33 | |
I'm stashing that money there. | 15:35 | |
Now, I say I have a perfect right to do this. | 15:38 | |
I don't have any intention of doing this | 15:41 | |
because what would be the point of my doing it? | 15:46 | |
It doesn't involve a violation of the law, | 15:51 | |
but it must be that if a person were to do this, | 15:54 | |
he's looking towards a time when he is | 15:58 | |
going to be violating the law. | 16:02 | |
And it is a matter of very common experience | 16:05 | |
that law-abiding citizens really get themselves into a jam | 16:09 | |
by doing innocent things which make no sense | 16:13 | |
unless they are to be followed up by guilty criminal acts. | 16:17 | |
And the chap who says, "Well, I'm just taking the money | 16:23 | |
"there and putting it into a numbered account. | 16:27 | |
"I don't mean any harm by it." | 16:27 | |
really is tempted later to say to himself, | 16:31 | |
"Well, why'd I go to all this trouble | 16:34 | |
"unless now that the blankety-blank government | 16:36 | |
"is putting in this measure or that measure, | 16:39 | |
"I don't cut a corner and cheat a little | 16:41 | |
"and, let's make no mistake about it, break the law | 16:45 | |
"and become subject to a jail sentence and fine | 16:48 | |
"by using this numbered account in an illegitimate manner?" | 16:54 | |
Well, we know that some Americans are doing this. | 17:00 | |
We know that some Americans | 17:03 | |
are doing this with legitimate money. | 17:05 | |
We also know that some of the Mafia | 17:08 | |
and some of the racketeers do this kind of thing | 17:11 | |
with criminal money. | 17:15 | |
No doubt there are certain physicians, | 17:20 | |
pillars of the community ostensibly, | 17:23 | |
the sort of people whom you read about in the paper | 17:27 | |
who keep a safe and have it robbed of $75,000. | 17:30 | |
You wonder why a physician | 17:35 | |
in a suburban neighborhood has $75,000 in a safe. | 17:37 | |
Not all of them, by the way, report their robberies. | 17:42 | |
And this represents income tax evasion money. | 17:45 | |
I'm not speaking of avoidance now, | 17:51 | |
which is every citizen's privilege to stay within the law, | 17:53 | |
but this is outright evasion. | 17:58 | |
Well, some of this money may be going to Switzerland. | 17:59 | |
Now, the errors and omissions then | 18:03 | |
may consist of items like this, and they are not random. | 18:07 | |
When the dollar is weak, the errors and omissions go up, | 18:13 | |
and they go up in the form of debits, | 18:18 | |
loss of foreign exchange for the United States. | 18:23 | |
But let's assume, as is pretty much the case, | 18:28 | |
that the residual item of errors and omissions | 18:33 | |
is a rather small item and that it swings, | 18:38 | |
although not negligible. | 18:42 | |
Can be ignored for the purpose of our discussion. | 18:44 | |
In that case, if there are no capital movements | 18:48 | |
and America is running a favorable balance | 18:52 | |
on current account, trade and invisibles, | 18:56 | |
the difference has to be paid by gold. | 19:02 | |
Now, if we treated gold as, say, | 19:06 | |
South Africa might be tempted to do, | 19:09 | |
as an ordinary item produced in mines, | 19:11 | |
the way coal is produced in mines, | 19:15 | |
and exported the way this country exports coal, | 19:18 | |
then we could've included the importing of gold | 19:25 | |
in the American balance of payments | 19:32 | |
on current account as a debit item. | 19:35 | |
And then the balance on current account, | 19:42 | |
inclusive of gold, would always exactly balance. | 19:44 | |
However, that's not the way it is done. | 19:48 | |
Gold is considered to be a part of our monetary system, | 19:51 | |
although its connection with our monetary system | 19:55 | |
domestically has become more and more remote. | 19:57 | |
Indeed, as we've seen in earlier discussions, | 20:02 | |
the connection of gold to international monetary systems | 20:07 | |
has also become more and more remote. | 20:10 | |
But in any case, there is a long historical tradition | 20:13 | |
which says that we keep the specie, precious specie, gold, | 20:19 | |
part of the balance of payments separate. | 20:23 | |
And we would show in the case that I've given, | 20:25 | |
where America has a surplus on private current account, | 20:30 | |
a continuous surplus matched by a continuous import of gold. | 20:33 | |
Something like this happened to us, actually, | 20:43 | |
throughout most of the 1930s. | 20:46 | |
It was helped along by Hitler's scaring | 20:48 | |
the propertied classes of Europe into wanting | 20:54 | |
to bring their money to a more secure place here. | 20:57 | |
But could it last? | 21:02 | |
Well, of course, America would end up | 21:06 | |
with all the gold in the world. | 21:08 | |
If, as I shall assume from now on, we think of gold mining | 21:12 | |
as being a rather negligible industry at this time. | 21:18 | |
Forget about South Africa, and think of this gold | 21:23 | |
as having to come from the central bank reserves | 21:26 | |
or from the individual reserves of the non-Americans. | 21:34 | |
The mercantilists, faced with this situation, | 21:40 | |
would have worried tremendously. | 21:44 | |
They would say, "America is imperialistically robbing | 21:47 | |
"the rest of the world of its bullion. | 21:50 | |
"The rest of the world must put in protective tariffs | 21:52 | |
"or quotas in order to protect its gold supply." | 21:56 | |
Now, the answer to that argument | 22:05 | |
was given almost exactly 200 years ago | 22:08 | |
by the canny Scotch philosopher David Hume. | 22:12 | |
What he said was, "Oh no, the automatic gold standard | 22:17 | |
"will work and it will be a self-regulating mechanism | 22:21 | |
"if you will let it be a self-regulating mechanism." | 22:25 | |
How? | 22:29 | |
Well, according to Hume, | 22:30 | |
the gold will come into the United States. | 22:32 | |
As the gold comes into the United States, | 22:35 | |
that being our money, | 22:38 | |
if we increase our total of money by 10%, | 22:40 | |
then according to Hume, | 22:45 | |
the price level in the United States- | 22:46 | |
Remember, this is a full employment economy all the time. | 22:49 | |
The price level of the United States will rise by 10%. | 22:54 | |
That follows from the so-called quantity theory of money, | 22:59 | |
or a better name for it would be | 23:03 | |
the quantitative theory of prices | 23:06 | |
in relationship to the quantity of money. | 23:09 | |
And it's a venerable theory which has | 23:13 | |
a good deal of long-run significance, | 23:17 | |
although we've learned that in the short run, | 23:20 | |
certain very important qualifications | 23:23 | |
have to be made to its application. | 23:27 | |
Now, mind you, according to Hume, | 23:30 | |
all prices are rising by 10% within the United States, | 23:32 | |
including all wage prices, | 23:37 | |
including the price of fertilizer, | 23:39 | |
including the price of raw materials. | 23:40 | |
And so the cost of production | 23:42 | |
in the United States is rising by 10%. | 23:44 | |
Meanwhile, what's been happening back in Europe, | 23:47 | |
which has been losing the gold? | 23:51 | |
Let's say for the sake of the argument | 23:53 | |
the economies are about the same size, | 23:55 | |
so they've lost about 10% of their gold to us. | 23:56 | |
According to the quantity theory of prices and money | 24:00 | |
of David Hume and later economists, | 24:03 | |
this must mean that all their prices fall by about 10%, | 24:07 | |
including all the prices which constitute | 24:12 | |
their costs of production, namely their wage costs | 24:16 | |
and their raw material costs and so forth. | 24:19 | |
Well, I simplify a little in my example, | 24:23 | |
but you can see the direction | 24:26 | |
in which equilibrium is to be restored. | 24:28 | |
With our costs high, we are no longer so competitive. | 24:31 | |
We can no longer push our bourbon whiskey, | 24:35 | |
and their Scotch whisky begins to look cheap to us. | 24:40 | |
So as a result, our surplus of credit export items | 24:43 | |
begins to diminish as we price ourselves out of the market. | 24:50 | |
Similarly, their goods become good buys for us, | 24:56 | |
and so our imports increase. | 25:00 | |
Now, looked at from their viewpoint, | 25:02 | |
this same process shows itself in the fact | 25:05 | |
that they have now very low, competitive costs, | 25:10 | |
and they are underselling us, | 25:13 | |
so their exports flourish and this corrects their debit. | 25:15 | |
Because mind you, one country's surplus on current account, | 25:18 | |
assuming there are no capital movements, | 25:25 | |
must be exactly matched by another country's | 25:28 | |
deficit on current account. | 25:31 | |
And so according to Hume, don't worry about the process. | 25:35 | |
Let the gold flow long enough. | 25:38 | |
You will create an inflation in the United States | 25:41 | |
which will raise costs in the direction | 25:44 | |
of restoring equilibrium, and you will create a deflation | 25:47 | |
in Europe which will lower costs | 25:50 | |
in the direction of equilibrium. | 25:53 | |
And we have here an example of a self-regulating mechanism. | 25:55 | |
It's a mechanism to be admired in the same way | 26:00 | |
that Isaac Newton's planetary system, | 26:03 | |
consisting of the planets, | 26:07 | |
subject to the universal law of gravitation | 26:09 | |
and needing no deity to guide them, | 26:12 | |
control their destiny in a stable and recurring fashion. | 26:17 | |
Okay, but I've been leaving out capital movements. | 26:25 | |
Now, let's introduce capital movements. | 26:28 | |
I said that if one country runs a surplus | 26:31 | |
on current account, it must be paid for by gold. | 26:34 | |
The other way it can be paid for is by IOUs. | 26:37 | |
The United States, which is running a surplus, | 26:42 | |
is investing money abroad. | 26:45 | |
Now, it's precisely at this point | 26:48 | |
that complications can come in | 26:51 | |
because these passing of IOUs from hand to hand | 26:53 | |
may encounter changes in willingness to take on IOUs | 27:00 | |
and changes in opportunities | 27:08 | |
to find good investments abroad. | 27:10 | |
We've seen this, to go to the French situation. | 27:13 | |
Prior to April, it looked as if | 27:18 | |
the French franc was in equilibrium. | 27:21 | |
Maybe it was even a very hard franc. | 27:24 | |
Maybe it was in surplus. | 27:27 | |
Then came the student uprisings, | 27:31 | |
and this did increase the costs within France. | 27:40 | |
Now, we would expect | 27:45 | |
that the increase of costs within France, | 27:47 | |
by the Hume mechanism that I described earlier, | 27:49 | |
would gradually, but over quite a long period of time, | 27:52 | |
begin to create a deficit for the French franc. | 27:56 | |
I've looked at the statistics, | 28:02 | |
and it appears that that deficit | 28:04 | |
in the current account figure of the French | 28:06 | |
had not in fact occurred between April and the present time. | 28:09 | |
The French exports were definitely | 28:15 | |
holding their own in growth | 28:18 | |
with respect to the French imports. | 28:20 | |
But I have not reckoned here | 28:23 | |
with the psychology of the French investor. | 28:25 | |
He decided that France, not being an island of serenity, | 28:28 | |
was a volcano under the surface, | 28:32 | |
and he became apprehensive that this process, | 28:35 | |
which Hume said would take a long time, would take place | 28:39 | |
and that he'd better get his money out. | 28:43 | |
And so in a very short period of time on capital account, | 28:46 | |
you can get tremendous movements | 28:50 | |
in the international balance of payments. | 28:53 | |
Well, what can be done about this? | 28:58 | |
One thing, if we had a free market | 29:01 | |
and the exchange rate were set by auction from day to day, | 29:03 | |
the French speculators who were getting out of the franc | 29:08 | |
would find that they were | 29:11 | |
selling francs on a falling market. | 29:12 | |
And as the franc fell-- | 29:15 | |
Of course, this is depreciation. | 29:17 | |
This is devaluation, if you wish. | 29:19 | |
They would begin to say, | 29:21 | |
"Well, does it really pay to sell at so low a cost?" | 29:23 | |
And economists are fairly confident | 29:28 | |
that a freely fluctuating market would find a balance. | 29:31 | |
Of course, in the short run, | 29:36 | |
we might find the exchange rate fluctuating very much. | 29:38 | |
It might drop, say, from 20 cents in a crisis | 29:42 | |
down to 16 cents or down to 15 cents. | 29:46 | |
My time is almost up. | 29:49 | |
I expect to return to this same subject, | 29:52 | |
but let me point out one favorable fact | 29:55 | |
that we can expect to operate in the case | 30:00 | |
of a freely fluctuating exchange rate | 30:03 | |
auctioned off from day to day. | 30:07 | |
When the French franc falls from 20 cents to, say, 15 cents | 30:10 | |
because of these panicky speculators, Frenchmen, | 30:14 | |
I as a canny speculator may say, | 30:22 | |
"Aha, these French francs are a bargain at 15 cents. | 30:25 | |
"I know that the basic current balance of France | 30:29 | |
"will be very favorable at a 15-cent franc, | 30:34 | |
"and the Hume mechanism will dictate | 30:37 | |
"that France will run a strong surplus at that level, | 30:42 | |
"and this will tend to make the price of the franc rise. | 30:46 | |
"And so I will come in as a counter-speculator, | 30:49 | |
"and I will bet that the French franc | 30:52 | |
"will not fall below 15 cents. | 30:54 | |
"Indeed, I will come in possibly as a speculator | 30:59 | |
"who enables French importers and exporters | 31:03 | |
"who don't want to take a chance on the fluctuating franc | 31:08 | |
"to buy insurance from me | 31:11 | |
"just the way they buy insurance from Lloyd's of London. | 31:12 | |
"Namely, they can hedge their transactions | 31:15 | |
"in international trade, and I as a speculator, | 31:17 | |
"for a small return to my canniness and to my risk taking, | 31:20 | |
"will provide that hedging service." | 31:24 | |
Well, I see that our time is up. | 31:27 | |
This is a very big subject. | 31:31 | |
I would like to return to it next time. | 31:32 | |
Thank you. | 31:38 | |
- | Thank you, Professor Paul Samuelson | 31:39 |
of the Massachusetts Institute of Technology. | 31:41 | |
If you have questions or comments | 31:44 | |
or perhaps suggestions for topics | 31:47 | |
you would like discussed in this series, | 31:48 | |
please send them to Instructional Dynamics Incorporated, | 31:50 | |
166 East Superior Street, Chicago 60611. | 31:53 | |
- | Okay. | 32:01 |
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