Tape 59 - The world wide money situation

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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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Title:

Tape 59 - The world wide money situation

Date:

circa 1970 to circa 1971

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

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Paul A. Samuelson papers, 1933-2010 and undated

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Paul A. Samuelson papers, 1933-2010

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Economics Cassette Series: Paul Samuelson

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Tape 59 - The world wide money situation

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