Tape 84 - Foreign reaction to American dollar evaluation

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-	Welcome once again as MIT Economics Professor,	0:02
	Paul Samuelson, discusses the current economic scene.	0:04
	This biweekly series was produced	0:07
	for Instructional Dynamics Incorporated	0:09
	and was recorded September 7, 1971.	0:11
	I'm just back from a quick trip to Europe.	0:15
	It was interesting to be in London,	0:18
	talk to people in the city in the aftermath	0:23
	of President Nixon's decisive action	0:26
	with respect to the dollar	0:28
	and with respect to his domestic programs.	0:31
	Of course what interested people abroad most	0:34
	was the behavior of the foreign exchange rates	0:38
	rather than what interested the man	0:42
	in the street in America most, namely the wage price freeze.	0:45
	Let me then give you some of the reactions	0:51
	that I encountered in talking to merchant bankers,	0:55
	to financial people, to economists,	0:59
	and in a limited degree, to the man in the English streets	1:02
	in Birmingham and in London.	1:09
	On the whole, President Nixon's program has been received,	1:15
	according to my samplings, very well abroad.	1:18
	I spoke to one merchant banker who confessed	1:23
	that he didn't understand why they were,	1:27
	they, the English financial community	1:29
	and the continental financial community,	1:34
	were not being more beastly about	1:36
	the President Nixon's program and he said	1:38
	the explanation that came to him	1:40
	was that everybody abroad had realized	1:42
	that the previous House of International Finance	1:46
	was a house of cards	1:50
	and that it was in a transitional state which could not last	1:52
	and so it was with a feeling of relief in a sense	1:57
	that the president's cutting off convertibility	2:03
	with gold had taken place.	2:08
	That then is the single most common reaction abroad.	2:11
	That, I think, cannot last.	2:20
	The knives are beginning to be sharpened	2:22
	and we are increasingly receiving criticism	2:25
	and will receive more criticism, I will predict,	2:29
	from people abroad because of what seems to them	2:32
	to be the unilateral character of the American policy.	2:36
	I should like to say that although I never hesitate	2:44
	to criticize the administration,	2:49
	and I never hesitate to criticize President Nixon	2:54
	when I think that his utterances are incorrect	2:56
	or ill advised or that his policies are not working.	3:00
	Still, I do not believe	3:04
	that I should feel critical of him in this regard.	3:09
	We know that there has been behind the scenes negotiation	3:16
	between our treasury officials	3:22
	and our fellow reserve officials for years now,	3:23
	suggesting to foreign governments,	3:28
	putting pressure upon foreign governments	3:34
	to our introducing some kind of flexibility	3:36
	in the foreign exchange set up.	3:38
	This is not something that Governor Dewey Daane	3:42
	of the Federal Reserve can go onto television to talk about.	3:45
	This is not something which, under secretary Paul Volcker,	3:51
	and both of these men I wish to point out	3:57
	represent continuity with the previous administration,	3:59
	they occupied essentially the same positions	4:02
	that they now hold in both the Johnson Administration,	4:05
	closing years of the Johnson Administration	4:11
	and in the Nixon Administration.	4:13
	They could not emphasize this,	4:14
	but you could read between the lines and in the lines,	4:16
	going way back to the Copenhagen Meetings	4:22
	of the International Monetary Fund and Bank	4:25
	and even earlier that the United States was pressing	4:28
	for a greater flexibility.	4:31
	We were imploring the Japanese to appreciate the Yen,	4:33
	in their interest as well as in our own	4:37
	and so, President Nixon really had no choice	4:40
	but to grasp the nettle himself.	4:45
	This raises the question of the 10% surcharge	4:48
	which President Nixon introduced along with his de facto	4:53
	suspension of the curtain vertability of official gold.	5:00
	In common with most economists,	5:03
	I have reservations about protective tariffs, about quotas,	5:08
	and about surcharges.	5:13
	I go along with the conventional wisdom,	5:16
	which says that depreciation of the dollar	5:18
	relative to other currencies provides	5:22
	the proper kind of protection which our industries need	5:24
	in a time when our currency is overvalued	5:28
	and that therefore it is redundant to also have a surcharge.	5:31
	I don't think that for the purposes of revenue alone	5:38
	a surcharge is very defensible in this modern age	5:42
	and it certainly is calculated to annoy foreigners.	5:46
	We economists should point out	5:55
	that a good deal of this annoyance is irrational.	5:56
	If they are not annoyed by the depreciation of the dollar,	6:01
	they should not be annoyed by a surcharge	6:06
	which has many of the same effects.	6:09
	None the less, they are annoyed.	6:13
	And yet, as I review the three weeks which have passed	6:16
	since President Nixon announced his program,	6:23
	it does become increasingly apparent	6:25
	that without the surcharge as a tactical weapon,	6:29
	the governments and central banks abroad	6:35
	would not have been even so cooperative	6:41
	as they have already been.	6:43
	Considering that the Japanese central bank,	6:47
	under instructions from the Japanese Government,	6:51
	has paid out more than four billion dollars worth of Yen	6:54
	to support the old parity of the Yen	6:59
	taking on that number of unnecessary dollars.	7:05
	We have to ask ourselves,	7:09
	how obtuse, how recalcitrant would they have been	7:10
	if there had not been the surcharge	7:15
	to shape them into reality.	7:18
	Very well then.	7:23
	The initial first couple of weeks' impact	7:24
	of the President's program has been on the whole, favorable.	7:27
	I did detect when I was in London	7:32
	something of a feeling of anticlimax	7:34
	because once the foreign exchange markets were reopened,	7:38
	once the dollar and all the currencies de facto	7:42
	began to float, it turned out that the dollar	7:46
	did not get itself depreciated very much,	7:50
	vis a vis, other currencies.	7:54
	The typical figure is three percent, four percent,	7:58
	five percent, depending upon whether we're talking	8:03
	about the pound or whether we're talking about	8:06
	the continental currency	8:09
	or whether we're talking about the Yen.	8:12
	Was all this bother worthwhile for so minuscule	8:15
	an amount of depreciation.	8:19
	You certainly have to be a besotted admirer	8:24
	of the classical mechanism of international exchange	8:28
	to think that pici-unis changes of this magnitude	8:32
	could compensate for a very large	8:36
	overvaluation of the dollar.	8:39
	Moreover, if we look at the German Mark,	8:42
	we have to realize that prior to President Nixon's action,	8:45
	it had already appreciated by about seven percent	8:50
	and although I haven't reviewed and checked with	8:55
	the very latest quotations,	8:58
	my impression is that the German Mark, as I speak,	9:00
	is at just about the same degree of appreciation	9:04
	vis a vis the dollar as it was	9:08
	before President Nixon's action.	9:10
	So we've had no further improvement along that front.	9:12
	A little wonder, then, that there is a sense of anticlimax	9:16
	around the world.	9:19
	It reminds me a bit of the phony war period	9:21
	in World War Two from the end of August 1939,	9:25
	beginning of September, when World War Two began	9:29
	with the Nazi invasion of Poland	9:33
	until the following spring, there was very little action.	9:36
	The French were under the illusion that the Maginot Line	9:41
	was holding and would hold	9:45
	and the German's having, by blitzkrieg, gone through Poland	9:46
	were gathering their strength for a blitzkrieg	9:51
	through Norway and the low countries.	9:56
	In the interval, it looked as if there wasn't	10:01
	very much of any warfare going on.	10:03
	That was, we now know, the calm before the storm.	10:08
	In a sense then, I think that we should not be misled	10:12
	by the moderation of the depreciations.	10:17
	The story is not yet over.	10:23
	I state that as a prediction,	10:27
	but I also state that as a pious wish	10:29
	because we have not yet had	10:33
	the amount of adjustment that is needed.	10:36
	It would seem, therefore, that one should	10:40
	form a judgment as to what's going to happen	10:45
	and what ought to happen	10:49
	by considering what economic principle,	10:51
	what economic analysis, economic theory tells us	10:57
	is needed to change the situation which had prevailed	11:01
	prior to President Nixon's actions of August 15th.	11:07
	For this purpose, let me quote freely	11:12
	from a small piece which I wrote	11:17
	for the London Sunday Telegraph in the immediate aftermath	11:20
	of the President's action.	11:24
	As I read this over a few weeks later,	11:28
	I have no particular cause to regret	11:30
	that I shot from the hip when asked by the editor	11:37
	to give my views and I should point out	11:42
	that having necessarily having to shoot from the hip	11:47
	without time to learn about	11:51
	what the administration's own views were,	11:55
	I certainly did not speak for the administration,	11:58
	I never speak for the administration.	12:03
	There are plenty of excellent economists	12:06
	who are called upon to speak for the administration	12:09
	and some of the things I said run contrary	12:15
	to some of the things which subsequently	12:19
	I heard the President's Press Secretary, state.	12:21
	Well, let me quote freely from this particular report.	12:28
	It's called The Dollar Crisis.	12:32
	I began by saying that although speculators can be blamed	12:35
	for the de facto suspension of convertibility,	12:40
	the evaluation if you like,	12:48
	the basic long run forces were that the dollar	12:50
	had given every sign of being overvalued currency	12:55
	for many many years	12:58
	and what set the speculators off	13:00
	was the news that our merchandise trade surplus,	13:02
	which equilibrium would have to be whoppingly positive	13:05
	and here I want to endorse the testimony	13:08
	of just the last week of an expert in international finance,	13:13
	Eduard Bernstein, very prominent consultant	13:19
	on international finance to many governments,	13:23
	formerly of the US Treasury,	13:25
	formerly of the International Monetary Fund.	13:28
	Although I had no knowledge of his position,	13:30
	specific position at that time,	13:34
	his views and mine turn out to be pretty, nearly the same.	13:36
	That what we need for equilibrium	13:42
	is a strong, positive surplus in our merchandise trade	13:45
	and a strong, positive surplus	13:51
	in our current balance overall.	13:51
	Perhaps something like seven billion dollars	13:58
	and of course, as the second quarter figures came out,	14:01
	it became apparent to everybody	14:05
	that we were not only very far from that number,	14:07
	but we were actually going into the red,	14:10
	into negative numbers for the first time since 1893.	14:12
	This inevitably, set the speculators noses to twitching	14:16
	and finally when the Royce Committee of Congress,	14:21
	so the Joint Economic Committee,	14:25
	came out with the flat-footed statement	14:27
	that the dollar was overvalued and that if necessary,	14:30
	there ought to be a revaluation,	14:34
	even a revaluation of official gold,	14:37
	the fact was in the fire.	14:40
	I said for the readers of The Sunday Telegraph	14:41
	that it would be instructive	14:45
	if I were now to dream some dreams, so here I begin.	14:46
	One, I said, the American dollar is to be lowered in value	14:52
	relative to SDRs, that is paper gold and official tier gold	14:57
	which incidentally must never again be confused	15:04
	with the free market gold	15:06
	of dentists, gangsters, and hoarders,	15:07
	and if this lowering of value of the dollar,	15:11
	this is a de facto and perhaps de jure devaluation	15:14
	with respect to paper and official tier gold,	15:20
	should be by the order of magnitude of say, 12%.	15:23
	That was a good, generous figure.	15:27
	I noticed that Dr. Bernstein doesn't go quite that far	15:29
	and although I didn't know it at the time,	15:36
	remember I was writing	15:39
	in the immediate aftermath of the crisis,	15:40
	Pierre Schweitzer, head of the International Monetary Fund,	15:43
	had also been leaking to the press	15:56
	the work of the experts in the International Monetary Fund	16:00
	who hoped for at least a small de facto and de jure	16:04
	official devaluation of gold.	16:10
	It was that leaked to the press which elicited from	16:15
	Mr Ziegler, the President's Press Secretary,	16:17
	denial that the administration had any intention whatsoever	16:21
	of changing the price of gold.	16:26
	That was point number one in my dream.	16:31
	Point number two, is the currencies	16:35
	of the surplus countries, most notably, Japan	16:38
	are not to change at all with respect to official gold.	16:41
	Hence, the deficit-ridden American dollar	16:47
	would thereby be depreciated by at least 12%,	16:50
	relative to the currencies of the surplus countries.	16:54
	Three, what about Canada	16:59
	and the various New World currencies	17:02
	that form the American block?	17:04
	It would be presumed that these American block currencies	17:07
	would go all or most of the way the the revalued dollar.	17:11
	That is, they would be devalued	17:16
	with respect to official tier gold by 10 or 12%.	17:18
	This leads us, finally, with lots of intermediate countries,	17:25
	countries such as Britain,	17:29
	which had neither so hard a currency as the Mark or the Yen,	17:31
	but not so soft a currency as the dollar	17:35
	and they might be expected to go about halfway,	17:39
	vis a vis official gold or that fraction of the way	17:42
	which the degree of strength	17:47
	of the balance of payments position of those countries	17:48
	would seem to warrant.	17:51
	I concluded my dream by saying,	17:55
	there is no need to make exact guesses and judgments	17:57
	in these initial resettings of parodies.	18:01
	For it is high time the world should move to a regime	18:05
	in which some flexibility of exchange rates	18:08
	is the standard feature.	18:10
	Whether this takes the form of crawling pegs	18:12
	or freely floating exchange rates	18:15
	or floating exchange rates subject to some intervention	18:16
	by the respective governments and central banks	18:21
	is not important.	18:25
	Well now, my purpose was not to dream impractical dreams,	18:29
	but I think that above dream tells us something	18:33
	about the direction the pragmatic reality should aim for.	18:36
	I went on to say, the first order of business	18:42
	is appreciation of the Yen	18:44
	and I must confess I could not believe the stubbornness	18:47
	of the Japanese Government,	18:52
	what seemed to be the willful ignorance.	18:54
	I've since learned that there are	18:58
	internal political reasons for that.	19:00
	These consist not simply of the understandable pressure	19:02
	from the export industries, from the shipping industries,	19:07
	many of which have contracts and dollars.	19:10
	For after all, any particular harm to those industries,	19:13
	which the government doesn't wish to happen	19:17
	could be compensated by subsidy.	19:19
	There now is talk of some aid programs	19:21
	to the victims of a Yen appreciation,	19:25
	but the more important reason is more ephemeral,	19:29
	namely that particular people in the Japanese Government,	19:32
	in the administration, who are jockeying for the succession	19:40
	to Prime Minister Sato,	19:43
	have gone out on a limb in this regard	19:45
	and so as long as they held power in the councils,	19:49
	they had a personal interest which I may say is divergent	19:54
	both from the national interest of Japan	19:59
	and from the international interest of the world	20:01
	to try ostrich-like to maintain the previous parody	20:05
	of the Yen relative to the dollar.	20:11
	Very well then.	20:17
	We'll suppose that the, that the Yen is appreciated	20:18
	by the amount roughly that I spoke of 10, 12, 15%	20:23
	one now begins to hear.	20:28
	The second order of business, I said,	20:31
	and now remember I'm writing for European audience	20:33
	is for all informed people abroad	20:37
	to realize that a depreciated dollar	20:40
	carries no threat of a massive invasion	20:43
	of European markets by American goods and services.	20:47
	I may say that I could only wish	20:52
	that such a massive invasion of European markets	20:55
	as a result of the kinds of exchange depreciates	20:58
	that I'm speaking of could possibly	21:01
	be feasibly in the cards.	21:03
	For if such a massive invasion were feasibly in the cards,	21:06
	it would enable us to restore equilibrium	21:11
	with a more moderate adjustment of parodies.	21:15
	Well, the sad truth is that it's not in the cards.	21:21
	At the same time that European intellectuals	21:28
	have been writing bestsellers on the challenge	21:30
	of the American leviathan,	21:33
	and have been bemused with America's competitive advantage	21:35
	in the realms of computers and aircraft,	21:42
	there are simple minds which cannot look beyond	21:45
	the two most dramatic aspects of our technology	21:48
	and civilization, namely computers and aircraft	21:51
	and forget how little these are in total importance	21:54
	relative to the total of goods in international trade	21:58
	and relative to the total of goods in the GNP.	22:00
	But while they were bemused with this American challenge,	22:04
	of course I have referenced to Servan-Schreiber's book	22:07
	on that, with that title.	22:10
	The statisticians have been recording a steady	22:13
	and almost unprecedented deterioration	22:16
	in the competitiveness of American industry.	22:20
	Take for example, our steel industry.	22:23
	Let no one think that a five percent or a 10%	22:26
	or even a 15% depreciation relative to the Yen	22:31
	and half that much depreciation relative	22:35
	to some other principle currencies	22:37
	would mean that American steel is gonna begin to	22:40
	land in European ports and Japanese ports	22:42
	and Australian ports.	22:46
	Our cost competitiveness is so far	22:48
	from being of the order of a 15% that	22:50
	that industry will still, I think,	22:57
	be screaming for protection and economists like me	23:00
	will still be objecting to favored treatment	23:04
	of such industries.	23:09
	Well, the dream world is over	23:13
	in which industry abroad could flood our markets	23:16
	and displace more American workers	23:21
	under the illusion that accepting return	23:26
	any amount of dollars, IOUs, if the process were generated,	23:28
	that this could go on.	23:32
	I had a letter from an old teacher of mine,	23:34
	Professor Hobueller, I had said some unkind words	23:36
	about the nine and neglect as ostrich-like policy	23:40
	which should have been forseeably understood	23:45
	not to be able to last	23:51
	and Professor Hobueller wrote that he had a clear conscious	23:54
	even though his pamphlet had used that title	23:58
	because what's the matter so long as the rest of the world	24:01
	will continue to send us goods for nothing.	24:06
	Why should we not accept them?	24:11
	And he went on to say in the teeth of the present crisis	24:15
	that the Japanese want to go on accepting dollars,	24:17
	that there was nothing wrong about,	24:21
	I'm not quoting him correctly and with full qualifications,	24:26
	the displacement of our industries by the Japanese imports.	24:28
	My answer was that this represented	24:36
	exactly the kind of thinking that I said was ostrich-like	24:38
	because it was unbelievable that the Japanese	24:41
	would in fact go on doing what they were doing	24:45
	in the first days of the crisis,	24:49
	namely buying for Yen any amount of dollars	24:51
	thrust to them at the previous parody.	24:55
	One must be realistic in making forecasts	24:59
	and that process cannot last and I would not	25:03
	disorganize any American industries	25:07
	in the expectation that we would have perpetual dumping	25:09
	of good Japanese goods on American consumers	25:12
	that would last and of course it has not lasted	25:19
	and would not last.	25:23
	Now, I dreamt a pleasant dream of the outcome.	25:26
	I may say that I don't wanna insist	25:31
	upon the details of it here,	25:32
	I have no particular brief for changing de facto or de jure	25:34
	the price of official gold,	25:40
	I just thought realistically that this was something	25:41
	which the Europeans would accept more readily	25:44
	and that it had none of the bad consequences	25:49
	or almost none of the bad consequences of the previous	25:51
	revaluations of gold before we had the two tier system,	25:55
	but let me in concluding say,	26:02
	that I also have a nightmare	26:04
	and that nightmare is that the world will turn into	26:09
	a chaos of exchange controls of trade wars	26:14
	and a tendency towards universal autarchy	26:19
	and already on my travels I have seen	26:23
	that there is an increase	26:25
	in the amount of exchange of controls.	26:28
	So, that although unilateral action	26:32
	by the President was necessary in grasping the nettle,	26:35
	in throwing the ball into the court	26:37
	of the Europeans and of the Japanese,	26:40
	we do not have unilateral power to introduce	26:42
	a nice state of flexible exchange rates	26:45
	near to the proper equilibrium parodies.	26:48
	We are in the same boat.	26:53
	There is a problem of persuasion here	26:54
	and the outcome is by no means optimistically clear.	26:58
	If you have any questions or comments	27:04
	for Professor Samuelson, address them to	27:05
	Instructional Dynamics Incorporated	27:08
	166 East Superior Street	27:10
	Chicago, Illinois 60611.	27:12

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Title:

Tape 84 - Foreign reaction to American dollar evaluation

Date:

1971

Contributor:

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 84 - Foreign reaction to American dollar evaluation

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