Tape 50 - The Wall Street situation

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-	Hello and welcome again, as professor Paul Samuelson	0:02
	of MIT discusses the current economic scene.	0:04
	This series is recorded for	0:07
	Instructional Dynamics Incorporated,	0:09
	on May 15, 1970.	0:11
	Professor Samuelson, I would guess that in view	0:13
	of recent developments on Wall Street,	0:15
	that's one of the topics you'll be discussing today.	0:17
-	Everybody is interested and concerned	0:19
	with the drop in stock market values.	0:23
	I've just been amazed at how my telephone	0:25
	has been ringing from the Associated Press	0:28
	and the Canadian Broadcasting Company	0:30
	and from one place or another,	0:32
	asking for comments on the stock market.	0:35
	I wish it were the case that when unemployment becomes high,	0:38
	much too high, that there was the same	0:42
	instantaneous concern everywhere.	0:44
	Moreover, I would say that the man in the street	0:47
	is himself concerned.	0:50
	I've also noticed that at every cocktail party,	0:52
	for the first time in recent weeks,	0:56
	people are speaking about their stock market losses	1:00
	and they're saying Professor Samuelson,	1:03
	you are an economist, sometimes they say this accusingly,	1:05
	what's the story on the stock market?	1:09
	So naturally, as the news is breaking,	1:12
	this is number one topic to talk about.	1:15
	Let me review the situation.	1:19
	First, the DOW-Jones index of 30 representative stocks,	1:24
	as I am now talking, is below 700.	1:31
	In 1966 and again, I guess, in 1968,	1:37
	it just about touched 1000.	1:41
	This means that 30% of market value	1:45
	has been lopped off those stocks.	1:49
	The same story is told if you look at more comprehensive	1:52
	index numbers of stock prices,	1:55
	and to make a long story short,	1:58
	when we take into account the awful beating	2:00
	that has been taking place on the American Stock Exchange,	2:03
	when we take into account the drastic declines	2:05
	that not everybody has noticed on the 10000 stocks	2:08
	which are quoted in the over the counter market.	2:11
	That's the market that's made by telephone every day.	2:14
	When we take all that into account,	2:17
	we must arrive at the conclusion	2:19
	that something like a quarter of a trillion dollars	2:21
	of net worth has gone down the drain, has disappeared	2:24
	from the balance sheets of the American people.	2:28
	In real terms the loss is something more than that,	2:34
	because of course the prices are rising,	2:37
	so what people feel they can buy	2:40
	with the net worth that's left to them	2:42
	is definitely down.	2:45
	Many people remember the stock market crash of 1929.	2:49
	They don't remember it, they've heard about it.	2:54
	They also know that the years from 1929 to 1933	2:56
	were very grim years.	3:02
	Indeed, it was not until 1939 and World War II itself	3:04
	that the American economy recovered	3:09
	from one of the greatest slumps in its history,	3:10
	The Great Depression.	3:13
	And so many people revert to the view that was popular	3:15
	during those days,	3:20
	namely that Black Thursday on October 29th,	3:22
	ended an era,	3:29
	and itself was the cause or the proximate cause	3:30
	of the The Great Depression that followed.	3:35
	Therefore I am asked, Professor Samuelson,	3:38
	does this drop in stock market prices	3:40
	mean that the American economy is going into crisis	3:43
	and that we shall have a great depression?	3:47
	My answer is I don't think so,	3:52
	but more interesting than my answer	3:55
	will by my attempt to give you the reasons why.	3:57
	Let's make no mistake about it,	4:04
	these losses have been large, they've been serious.	4:07
	You have friends who've been very hard hit by them,	4:09
	if you yourself have not been.	4:12
	If you own your stocks outright,	4:15
	the loss will seem to you mainly psychological,	4:16
	but those stocks may have been accumulated	4:20
	to send your boy to college.	4:22
	If your brother-in-law borrowed money in order	4:23
	to buy stocks, he may actually be in bankruptcy.	4:27
	Same thing is true about a number of large financial firms.	4:32
	Part of the inventory of business,	4:37
	that a large Wall Street firm has,	4:40
	is its inventory of stocks,	4:43
	just as a haberdasher must have inventory	4:45
	of ties and neckties in order to be able	4:47
	to serve his customers,	4:49
	so it is inescapable that a large house	4:50
	that deals in the over the counter market	4:56
	which takes positions in the actively traded stocks	4:58
	so that it can accommodate large institutional	5:03
	buyers and sellers,	5:06
	it holds an inventory of common stocks.	5:08
	What happens if you're holding inventory	5:12
	at a time when prices are falling?	5:14
	You know what the answer is.	5:16
	You are taking a terrible beating in your earning statement,	5:18
	in your statement of profit and loss,	5:20
	and in your balance sheet.	5:22
	And as a matter of fact, if your assets decline	5:24
	and your liabilities stay the same,	5:27
	you may find yourself actually bankrupt.	5:30
	So it would be no surprise if there were a number	5:33
	of prominent Wall Street member firms	5:37
	which went into bankruptcy.	5:40
	We already had Ira Haupt and Company,	5:43
	which went into I suppose receivership or bankruptcy.	5:45
	That was because of a scandal connected with soybean oil.	5:48
	Nobody lost any money, that is no customer of the firm,	5:54
	because the stock exchange ponied up a defense fund	5:56
	to bail out such people.	6:02
	And one can confidently predict	6:05
	that if one or two or three substantial	6:07
	Wall Street member firms should go into bankruptcy	6:11
	that the rest of the 1333 members of that exclusive club	6:15
	will assess themselves to raise a fund	6:22
	so that no customer will lose money	6:26
	in consequence of that bankruptcy.	6:30
	However the knowing person will say that works very well,	6:33
	if because of some peculiar stupidity	6:36
	of one or two or a few firms, they go broke.	6:39
	That protects against dishonesty,	6:42
	that protects against fraud,	6:44
	that protects against extraordinary stupidity,	6:46
	but what happens if the whole American economy goes to hell	6:49
	and the DOW Jones average plunges to 400 or 300	6:53
	or if we should use the example of the decline	6:59
	in stock prices from 1929 at the top to the bottom in 1933,	7:02
	I suppose that more than 80% of all values,	7:09
	and so we should be talking here	7:13
	of a DOW Jones index of 190.	7:15
	When that happens, won't substantially,	7:18
	all of the 1300 members of the stock exchange,	7:23
	be busted and in no position to bail out the others?	7:26
	The answer to that I think is simple.	7:33
	It's true.	7:34
	A decline of that magnitude could not be handled	7:37
	by the private resources of the people	7:40
	who are involved in the debacle.	7:43
	I suppose that at that point and in some degree,	7:46
	in the modern welfare state, the modern mixed economy,	7:50
	we would see some Reconstruction Finance Corporation	7:54
	kinds of activities,	7:58
	and who knows, if that happened,	7:59
	and let me say now,	8:03
	just so that nobody be alarmed,	8:04
	the probability of that happening,	8:07
	I regard as minuscule,	8:10
	but if it should happen,	8:12
	we might come out of that period with a new era,	8:13
	in which the government is in the act,	8:16
	and just as we have a guarantee of the FDIC,	8:19
	that's the Federal Deposit Insurance Corporation,	8:22
	which now as a government corporation, makes provision	8:26
	so that no depositor in a commercial bank	8:30
	will lose because of its bank failure	8:33
	or even because of widespread bank failures	8:36
	all over the country.	8:39
	So you might have a federal equity insurance corporation	8:40
	which insures stockholders against	8:45
	a certain measure of loss.	8:49
	I say a certain measure of loss	8:52
	because obviously when you're dealing with something	8:53
	like equities, there's got to be a up and down,	8:55
	and if the government could insure you against	8:58
	all loss in equities, in effect, the government	9:01
	would be the equity owner.	9:03
	Short of that, there are also some things that could be done	9:06
	and since there's been so little comment on them	9:09
	in our press, I perhaps owe it to my subscribers	9:11
	to make mention of them.	9:15
	The Japanese stock market took an awful beating	9:17
	a few years ago.	9:20
	Every housewife in Japan had become persuaded	9:24
	of the merits of mutual funds.	9:27
	These were sold on a penny basis,	9:30
	I should say a yen basis, door to door.	9:32
	Some politically minded people in Japan	9:37
	thought that was a way of making the country conservative.	9:39
	If the wife is stashing away a few yen in mutual funds,	9:41
	won't she have influence upon her husband	9:47
	not to vote for the socialist party?	9:51
	I don't know whether it's worked out that way,	9:54
	it is true that the rapid growth pattern of Japan	9:55
	has led to a prosperity which has been accompanied	9:58
	by successful elections by the,	10:02
	I guess we could call it the conservative party,	10:07
	although that's not its name, of course.	10:09
	Not conservative by our standards.	10:12
	Senator Goldwater would not care for the conservative party	10:14
	of Japan, nor would the John Birch society,	10:17
	nor would the strong exponents of a laissez-faire,	10:21
	free economy.	10:25
	Well, what do you do when the prices are dropping,	10:27
	and if I can remember, the DOW Jones Tokyo, so called,	10:33
	index, dropped from 1800 to below 1200.	10:37
	That would be like our index dropping,	10:42
	18, 12, by a third, that would be,	10:47
	well that isn't so different from our index	10:50
	having dropped to between 600 and 700.	10:53
	To keep it from dropping further however,	10:57
	the Japanese government set up a governmental agency	11:00
	charged with the job of supporting the stock market	11:05
	by buying in stock.	11:10
	I suppose the ultimate capital credit for the operation	11:12
	came from the central bank, the Bank of Japan.	11:16
	And so that could conceivably come to pass in this country.	11:22
	We don't see president Nixon, who seems to be occupied,	11:29
	I hope we can get to that momentous question	11:32
	before this time is over,	11:35
	who seems to be occupied with military matters.	11:38
	We can't see him soon doing this,	11:41
	but it's amazing how in crisis attitudes do change,	11:45
	and so you could have a government agency,	11:48
	like the Reconstruction Finance Corporation,	11:52
	whose only task is to pump money into the stock market	11:54
	by giving bid orders for a wide range of securities.	11:57
	This would be of course, one possible form	12:03
	of socialization of the economy.	12:06
	The private economy panics and sells out	12:10
	its equity ownership in our large corporations	12:13
	to the government.	12:16
	When the government owns securities,	12:18
	I dare say Nader's Raiders and the students	12:20
	will put pressure upon it to exercise its proxies	12:24
	and General Motors will not find	12:26
	that it can make its decision about lead in the gasoline	12:28
	and the compression ratio of autos and their safety features	12:35
	as the management of that company would like to,	12:39
	but the public interest will intrude itself	12:41
	in a very observable form.	12:44
	The Japanese case was rather successful.	12:48
	They did help keep the market from going down,	12:51
	and then as always happens when you	12:55
	have successful stabilization, or often happens,	12:56
	as the market went up, the Japanese agency	12:59
	has been able to sell back its stocks,	13:01
	take back money, and I dare say often at a profit.	13:05
	I should call your attention a second and similar incident.	13:09
	When Mussolini was the dictator in power in Italy,	13:12
	during the Great Depression,	13:16
	the Italian stock market fell apart,	13:18
	and a number of the largest Italian industrial corporations	13:22
	were in real trouble,	13:25
	and so an agency whose initials I do not exactly remember,	13:26
	it begins with E, something like ENI,	13:30
	was set up, and this agency acquired	13:33
	as a stabilizing and mopping up operation,	13:37
	a significant equity ownership	13:42
	in some of the largest Italian organizations.	13:44
	It turned out after World War II	13:49
	that this agency became an important factor	13:51
	in the rather remarkable post-war recovery of Italy,	13:54
	and let me just call it the ENA for the purpose	14:00
	of the present discussion, whether	14:02
	that be its correct name or not,	14:05
	the ENA was involved in lots of the	14:06
	public utility ownership and operation within Italy.	14:09
	Similarly with certain corporate activities	14:13
	it had a large ownership in the large corporations,	14:15
	and it even got involved in making contracts	14:20
	for oil exploration and exploitation	14:24
	with the sultans and potentates of the near east.	14:27
	We could come to that, but I rather doubt	14:33
	that the situation will deteriorate to a point	14:36
	to call for that.	14:40
	Now why do I think that short of such operations	14:44
	that the decline in the stock market	14:47
	will not itself be a major factor	14:50
	plunging us into a deep depression?	14:52
	There used to be a theory in the 1920s	14:56
	that the stock market, as Wall Street goes,	14:59
	so goes the nation.	15:02
	It was like the theory that all depressions	15:04
	start on the farm	15:07
	and that you had to support the agricultural sector	15:08
	because if you didn't, industry would suffer.	15:11
	We are all in the same boat together,	15:15
	but we're not all in intercommunication to that degree	15:17
	and nobody believes that the health of the farm sector	15:20
	of the economy is the crucial determinant	15:25
	of the macroeconomic GNP fluctuations	15:27
	of the American economy.	15:30
	Also very few people, up until now in recent years,	15:32
	have been of the opinion	15:37
	that as Wall Street goes, so goes the nation.	15:38
	I recall that the late Ernest Henderson,	15:41
	the president of the Sheraton corporation,	15:45
	a very successful entrepreneur, was of the opinion,	15:49
	and if you have stopped in a Sheraton hotel,	15:53
	just as there is a Gideon Bible in many hotel rooms,	15:56
	you would find a copy of, I guess it's Mr. Sheraton	16:02
	is the title of the autobiography by him,	16:05
	and in that he expounds the notion	16:08
	that the behavior of the stock market	16:10
	with a variable lag, say six to nine month lag,	16:14
	that has a all familiar ring to it,	16:18
	will determine the behavior of GNP.	16:20
	I can recall, he's dead now,	16:25
	and I only tell this story for its scientific information,	16:26
	I can recall being invited to lunch with him in 1962,	16:31
	the last time Wall Street was going to hell,	16:37
	and he told me that he had a message to give me,	16:41
	which I should pass on to then President Kennedy,	16:44
	namely that with very little doubt,	16:46
	the country would be in severe recession.	16:50
	Our meeting was the let us say, June 1,	16:54
	just at the low point of the market,	16:58
	that by July 15th and certainly by September 15th	17:02
	the country would be in a very severe recession.	17:05
	Well, the Henderson thesis never got a complete testing	17:07
	on that occasion,	17:11
	because if the market is important,	17:13
	nobody thinks that a short term dip in the market	17:15
	can be important.	17:19
	It must be a more permanent destruction of net worth	17:21
	to have a strong quantitative effect	17:25
	upon the economy.	17:28
	The Henderson view, as I say, is not the popular view today.	17:30
	I would say that most economists and man of the street	17:35
	would probably go onto the other extreme.	17:39
	The other extreme which is a bit extreme, I think,	17:40
	is that the market is a sideshow, it's a casino,	17:44
	it's where fat men with a penchant for arithmetic	17:47
	take each others' money away	17:49
	and sometimes fleece the public,	17:51
	but the sideshow is not the main show.	17:53
	The tail of the dog is not the dog,	17:56
	the body of the dog is GNP, the tail of the dog	17:59
	is the stock market.	18:02
	By and large the body wags the tail,	18:03
	and the market, the stock market takes its cue	18:07
	from business conditions, rather than vice versa.	18:10
	It's a little bit more complicated that that of course,	18:15
	because the stock market tries to take its cue	18:17
	from where it reasons business will soon be.	18:20
	The market's always looking ahead.	18:24
	But if you say that the future of general business,	18:25
	the body of the dog, is determined	18:27
	by the present of the business conditions,	18:29
	then we can say via a chain of expectations,	18:33
	it is the arrow travels from GNP to the stock market,	18:38
	rather than vice versa.	18:42
	Images are helpful, but they can also be harmful.	18:46
	I suppose the body of a dog does wag the tail,	18:50
	and the tail doesn't wag the dog,	18:51
	but we know that when the earth attracts the sun,	18:53
	excuse me, when the sun attracts the earth,	18:57
	the earth is also attracting the sun.	18:59
	When a ball falls to earth, the earth is also rising	19:01
	toward the ball, according to Newton's law	19:05
	of action reaction.	19:07
	And so applying this analogy to the present case,	19:09
	I believe it is sound economics to realize	19:11
	that there is some significant reflux interaction	19:14
	going back from the tail to the dog.	19:19
	But let's keep our quantitative sense of proportion.	19:24
	It is vastly smaller than is believed to be the case	19:27
	by the late Ernest Henderson or advocates of that school.	19:31
	What it means concretely is	19:37
	that this destruction of market values,	19:39
	which is having its toll of psychology	19:42
	and could soon quite possibly spread	19:42
	to entrepreneurial decisions with respect to,	19:46
	say plant and equipment expenditure,	19:49
	this will have perceptible effects, possibly,	19:51
	on the propensity to consume,	19:57
	on how much money we spend out of each income level,	19:59
	and of course, in a period of mini-recession,	20:02
	if people spend less of their income,	20:06
	that means very soon that their incomes	20:08
	will also be less,	20:10
	because spending makes income, income makes spending.	20:12
	Similarly, we know that there is a great deal	20:16
	of external financing needed by corporations	20:20
	if they're going to come anywhere close	20:24
	to fulfilling the plant and equipment intentions	20:26
	of expenditure which they have reported to the SEC,	20:29
	which they have reported to McGraw-Hill,	20:35
	which they have reported to the Renfrey Organization.	20:37
	And here too, the decline in the stock market	20:40
	makes for less investment spending.	20:44
	All this means in my judgment is	20:47
	that one new adverse factor has been added to the equation	20:50
	with respect to the development of business	20:56
	in the remaining months	20:59
	and in the months of 1970 and in the year ahead.	21:01
	All that that means, since we do not live today	21:09
	in the age of Herbert Hoover,	21:11
	but do live in the age of the mixed economy,	21:14
	is that any weakness emanating from the stock market itself	21:16
	must call for countervailing strength	21:19
	as a result of stabilization policy.	21:26
	Concretely this means that if previously	21:28
	exactly 4.5% rate of growth of the money supply	21:32
	was what the doctor ordered for good performance	21:36
	in this economy,	21:40
	then it should now be let's say 5.5%.	21:42
	Concretely this means that if previously	21:45
	a two billion dollar budgetary surplus	21:49
	was exactly what the doctor ordered	21:52
	for proper stabilization, anti-inflation policy,	21:55
	then less than a two billion dollar surplus	22:00
	would now be indicated.	22:04
	Maybe only a half a billion dollar surplus.	22:07
	Or just so we make no fetish	22:10
	of balancing the budget as such,	22:13
	if previously the budget should've been balanced exactly,	22:15
	then maybe now the budget should prudently be in deficit	22:18
	by a billion and a half dollars.	22:23
	Now I hold no brief for the particular numbers	22:27
	that I have used, 4.5% rate of growth of the money supply	22:29
	to 5.5%, balanced budget to a deficit	22:32
	of a billion and a half.	22:36
	Those perhaps exaggerate the importance	22:39
	of the decline in the stock market	22:40
	as far as it has gone up to this moment,	22:44
	although if you wanna believe the boogeyman stories	22:48
	that are really going the rounds now	22:52
	of what could be in the cards,	22:55
	then the prescription I've given you	22:56
	is actually an inadequate one.	22:58
	Nevertheless, I would have confidence	23:03
	if we had a government interested and alert	23:06
	to do macroeconomic stabilizing,	23:12
	I'm now not talking about a perfectionist	23:15
	fine-tuning administration,	23:17
	but just a responsible administration,	23:19
	the sort of administration	23:22
	that I hope the Nixon administration will become	23:23
	and act like in the months ahead,	23:29
	if this sort of a situation develops,	23:33
	then I think that these downward influences	23:34
	emanating from the stock market and from Wall Street	23:38
	can rather easily be handled, can rather easily be offset.	23:41
	This will not make happy the man who has tremendous losses,	23:48
	which perhaps he himself will never recoup,	23:52
	but it's the body politic that I'm interested in primarily.	23:55
	I have only a few minutes left,	24:00
	let me on this occasion very quickly say where I think	24:03
	we stand with respect to the mini-recession.	24:07
	The April figures have come in, the production index	24:12
	was down again.	24:15
	We've had this bad stock market news.	24:18
	No man can assert with confidence	24:21
	that the mini-recession or recession	24:27
	if it's going to be called a recession, is over.	24:30
	On the basis of the evidence that I've seen so far,	24:33
	it seems to me that it still is a pretty good bet	24:37
	that the second quarter will not show a decline	24:41
	in real GNP,	24:45
	but it could be that the second quarter	24:48
	will show a further small decline in real GNP.	24:51
	In that case I think it's a pretty good bet	24:54
	that the third and fourth quarter	24:57
	will, as almost everybody has been saying,	24:58
	register a rise in real GNP.	25:03
	Unemployment will still continue to rise,	25:06
	profits will still continue to be down	25:09
	and to have further pressure on them,	25:11
	but if there was a recession, that recession will be over.	25:13
	Having said that, I want in the closing minute,	25:19
	to comment on the interrelationship between	25:24
	what is going on in our society and economics.	25:27
	You know the economic system is part	25:31
	of the total environment.	25:33
	It cannot be immune from what is happening in society.	25:34
	In my judgment, something very serious is taking place	25:38
	in American political and social life.	25:41
	We are seeing in an acute form at the moment,	25:44
	an estrangement of a whole stratum of American life	25:47
	from the mainstream of American life.	25:51
	I'm referring to the fact that the whole	25:54
	college and university community	25:56
	is increasingly at odds with much of the rest of society.	26:00
	I think this is a very serious matter.	26:06
	The strikes on campus incident to the announcement	26:10
	of the Cambodian adventure or escapade	26:13
	or call it what you like, will quiet down,	26:17
	the summer is coming.	26:20
	The memory of those shot at Kent State	26:23
	will grow dimmer.	26:26
	And human nature being what it is,	26:29
	the black college students who were killed	26:32
	in Jackson, Mississippi will not awaken	26:35
	the resonant response in the whole community	26:38
	that the Kent State massacre did.	26:43
	Nevertheless, it will not be soon	26:46
	that the words of a president,	26:48
	perhaps a distraught president,	26:50
	calling college students bums,	26:52
	that will not soon be forgotten,	26:55
	and Vice President Agnew's attacks	26:57
	upon the university community would be exactly	27:02
	an answer to the prayers of any member to the extreme left	27:07
	who hopes that the university community	27:12
	can be estranged from the mainstream of life,	27:15
	just as it answers the prayers of those	27:18
	on the extreme right who wish to condemn	27:21
	the university community.	27:25
	My purpose here is not to read any kind of a sermon,	27:27
	but in connection with the commentary	27:30
	on these cassettes in the weeks to come,	27:34
	I'm afraid we shall have to make reference many times	27:36
	to what is happening outside the economy,	27:40
	because how can an economic system remain healthy	27:44
	when the society in which it's embedded	27:49
	is very, very sick?	27:52
-	Thank you, Professor Samuelson.	27:54
	If you have any comments or questions	27:55
	for Professor Samuelson, address them to	27:57
	Instructional Dynamics Incorporated,	28:00
	166 East Superior Street, Chicago, Illinois, 60611.	28:02

Item Info

Title:

Tape 50 - The Wall Street situation

Date:

circa 1970

Contributor:

Samuelson, Paul A. (Paul Anthony), 1915-2009

Subject:

Format:

audiocassettes

Language:

English

Digital Collection:

Paul A. Samuelson papers, 1933-2010 and undated

Source Collection:

Paul A. Samuelson papers, 1933-2010

Series:

Economics Cassette Series: Paul Samuelson

Rights:

Limited Re-Use

CC BY-NC 4.0

Rights Note:

This material is made available for research, scholarship, and private study. Copyright in this material has not been transferred to Duke University. For reuses of this material beyond those permitted by fair use or otherwise allowed under the Copyright Act, please see our page on copyright and citations: https://library.duke.edu/rubenstein/research/citations-and-permissions.

Identifier:

RL10082-CS-0050
ref2239_ayn
samuelsonpaul
duke:325073
pstau001050
ark:/87924/r4ft8f17m
00fc73d7-a566-43d5-b482-4ab9acf2c350

Permalink:

https://idn.duke.edu/ark:/87924/r4ft8f17m

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Tape 50 - The Wall Street situation

Transcript

Item Info

Economists' Papers Archive

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