Tape 86 - European viewpoint of Nixon economic policies

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-	Welcome once again as MIT professor Paul Samuelson	0:02
	discusses the current economic scene.	0:04
	This biweekly series is produced	0:07
	by Instructional Dynamics Incorporated,	0:08
	and was recorded October 4th, 1971.	0:11
-	It's a great advantage when one is giving a public lecture	0:14
	to see the faces of the audience before you	0:17
	and to be able to judge from those faces	0:21
	what their interests are.	0:25
	Doing cassette recording	0:28
	is a rather anonymous procedure,	0:30
	and one is never sure exactly who the audience is.	0:31
	I was surprised pleasantly	0:35
	last week when conferring with some foreign central bankers	0:39
	here in this country for the IMF meetings	0:45
	to learn that some of them	0:49
	spend part of their	0:52
	hours each month	0:56
	listening to these cassette recordings,	0:58
	which I am now making.	1:01
	One knows that the subscribers of this series	1:06
	consist of economists and corporations and in banks,	1:08
	and often officers in such institutions	1:13
	and other financial institutions.	1:18
	One knows that there are a certain number of universities	1:21
	who take recordings like this for use among the faculty	1:26
	and also in classes in economics.	1:33
	But the thought that,	1:38
	as I now speak,	1:42
	certain people in the central banks of Europe	1:44
	are pondering over my every word	1:46
	is as sobering as it is gratifying.	1:49
	It also suggests that, this morning,	1:53
	I should return once again	1:56
	to the number one problem of the Nixon NEP program	1:58
	as that problem looks from abroad.	2:04
	Namely, what is happening to the foreign exchange markets?	2:07
	What is happening to the reform	2:13
	of the Bretton Woods system?	2:15
	What are the reasonable probabilities	2:18
	for the future development	2:23
	of our international financial system?	2:25
	Let me return to that subject,	2:30
	not hesitating to repeat some of the elements	2:33
	that have already been touched upon in recent tapes.	2:37
	First, we have not yet had a de facto settlement.	2:44
	The situation is still fluid.	2:49
	The solutions are still up for grabs.	2:53
	I'm very happy to note	2:56
	that among many of the people who gathered	2:59
	in Washington these last couple of weeks,	3:03
	there is agreement	3:05
	that premature solutions are to be avoided.	3:07
	I should add that in the words	3:12
	of one of the important central bankers,	3:13
	there's very little danger of a premature solution.	3:18
	We do not yet have an emerging consensus.	3:22
	But it is not such an awful thing	3:27
	to have currencies floating,	3:31
	as we have learned	3:33
	since last May	3:36
	and in earlier periods when currencies were floating.	3:37
	The	3:41
	bulk, let me put it differently.	3:45
	Perhaps 30% or 35% of all the international business	3:48
	that is being done today,	3:53
	particularly the international business	3:54
	among the countries of the West and Japan,	3:56
	I'm excluding now the common from	4:01
	countries of Eastern Europe,	4:05
	is being done on the base of floating exchanges.	4:08
	The mark's been floating, the guilder's been floating,	4:11
	the Belgian franc is somewhat floating,	4:14
	and the sun has not ceased to rise each morning.	4:17
	The world continues.	4:23
	There is very little evidence that has yet accumulated	4:26
	that the	4:29
	period of float has begun to show	4:33
	downward adjustments in the volume	4:36
	of international trade.	4:38
	The uncertainties in international trade	4:39
	have not been so great	4:40
	that a competent observer can find	4:42
	that there's a deceleration of trade going on.	4:45
	Let me add at this point that,	4:49
	objectionable as the 10% import surcharge	4:52
	that President Nixon put in by executive order	4:55
	must seem to foreign observers	4:58
	and to many domestic observers, like myself,	5:01
	interested in freer international trade,	5:04
	we should not exaggerate the quantitative impact	5:08
	of that surcharge.	5:13
	That surcharge has been in effect	5:15
	increasingly because the goods in transit	5:19
	were excluded from it.	5:21
	Although the number is 10%,	5:24
	you mustn't think for a moment	5:26
	that this is the equivalent	5:27
	of a 10% depreciation of the dollar	5:29
	in terms of competitiveness.	5:31
	For one thing, a 10% depreciation of the dollar	5:33
	would apply as a subsidy to American exports,	5:36
	and of course,	5:39
	the import surcharge occurs only as a subsidy	5:40
	to domestic producers in America	5:43
	who are competing with goods	5:46
	which might otherwise be imported into America.	5:47
	But even on that half of the problem,	5:50
	it's not a 10% charge, really, on all of our imports,	5:53
	since the way	5:58
	the law or order is framed	6:00
	is it's a charge only upon dutiable imports,	6:03
	and a very sizable fraction of all of our imports	6:07
	have no duty at all,	6:12
	and there will be no import surcharge upon them.	6:12
	This is particularly true, of course,	6:15
	of raw materials and staples of that type.	6:16
	It would be hard for me,	6:23
	perhaps hard for anyone at this point,	6:25
	to quantify exactly what the strength of the surcharge is	6:27
	in overall quantitative terms,	6:32
	but one suspects that it's more in the neighborhood	6:34
	of 2% or 3% than of 10%.	6:36
	And since actually,	6:42
	this 2% or 3% of all of our imports	6:43
	which the surcharge constitutes	6:49
	must be considered	6:53
	before value is added by our producers,	6:56
	the actual increase in prices to American consumers	6:59
	of imports from abroad are not even 3%.	7:05
	It's been an embarrassment to a number of our importers	7:09
	that the way that the import surcharge is levied	7:12
	reveals to the consumer how small is the total	7:17
	paid to the producers abroad.	7:21
	Therefore, by ordinary elementary principles of economics,	7:25
	it can be shown that the volume of business	7:31
	which will be lost to	7:34
	would-be exporters to the United States	7:37
	through the elasticity of demand	7:40
	now that their goods cost a little more	7:42
	is really quite small in percentage terms,	7:44
	given reasonable elasticities of demand.	7:47
	I have been hearing from various sources	7:51
	that the Japanese producers, particularly small business,	7:55
	who were frightened to death by the prospect of a surcharge	8:01
	and thought this was gonna hit them very hard,	8:04
	have found that they're doing	8:06
	a very nice business, thank you,	8:08
	with the United States,	8:10
	in this period after the surcharge has been in effect.	8:12
	For example, there was a report from Japan	8:16
	of 26 small toy manufacturers.	8:20
	These are the kinds of people	8:25
	whom you might expect to be most hit,	8:26
	since they're small, since they have no monopoly power,	8:29
	very little market power.	8:32
	But to their agreeable surprise,	8:34
	they are all sold out for the present Christmas season,	8:37
	and the orders are still coming in very nicely	8:41
	for the season after that.	8:43
	I emphasize this continuity because it shows	8:48
	that a premature solution of the wrong type	8:51
	does not have a lot to be said for it.	8:56
	We do have a tolerable situation.	8:59
	Nevertheless, I have not gone along	9:04
	with the common notion that it would not matter	9:07
	if we do not have a solution for one year,	9:12
	two years, three years, or four years.	9:15
	Of course, those people whose preferred feasible solution	9:16
	is that all currencies float at all times forever,	9:22
	such people are hoping that there will never be a solution.	9:26
	My concern is that when the world learns	9:32
	that it can live with this halfway house tolerably	9:35
	that the steam will be off for any kind of reform.	9:41
	We need, therefore, a compromise	9:47
	between not doing things too hastily,	9:49
	but not being too comfortably slow in doing anything,	9:52
	because if you're too comfortably slow,	9:55
	we may find that nothing of fundamental importance	9:57
	will be arrived at by collective agreement	10:02
	of the Club of 10 or the IMF club of more than 100 nations.	10:05
	Well, what's so bad about that?	10:13
	What I fear about that situation is that instead of having	10:15
	this comfortable, tolerable situation	10:19
	that I've just been talking about	10:22
	and which by and large, we still are enjoying,	10:23
	that the world may slide into	10:26
	retaliatory import and exchange restrictions,	10:29
	and the new trade war which is in everybody's mind,	10:33
	which everybody very rightly fears,	10:36
	that may develop.	10:39
	We won't remain in, really,	10:42
	anything like an optimal situation.	10:45
	On the question of the price of gold,	10:48
	that is, the price of paper gold in terms of dollars,	10:52
	the price of official gold in terms of dollars,	10:55
	it is my feeling that since my earlier tape recordings	10:58
	that the view which I have espoused	11:02
	and which has been espoused generally,	11:05
	that the United States should not consider	11:07
	the fundamental tenet never to raise	11:11
	the official price of gold.	11:13
	But that view is gaining ground,	11:14
	and I'm hopeful that it's gaining ground	11:16
	in the minds of President Nixon,	11:21
	of Secretary of Treasury Connally,	11:24
	of Undersecretary Paul Volcker,	11:27
	Dewey Daane of the Federal Reserve Board,	11:31
	Arthur Burns,	11:34
	chairman of the Governors of the Federal Reserve board.	11:34
	This is and should be definitely a negotiable matter.	11:39
	If the rest of the world wants us to make this	11:44
	token adjustment, if you want to call it that,	11:50
	let's we in the United States be prepared to make that.	11:52
	I should emphasize, though,	11:58
	that token adjustments are token adjustments,	11:59
	and the real crunch which will come later	12:01
	when the exports of the surplus industries	12:04
	are necessarily cut down	12:06
	cannot be sugarcoated	12:09
	by these particular face-saving devices.	12:11
	It's just as tough on a Japanese toy factory	12:14
	if its volume of business is cut down by 25%	12:19
	or if it is put out of business,	12:22
	that this has been done by the United States	12:24
	making some nominal changes	12:28
	in the dollar price of official gold,	12:29
	and other countries making some partway change in	12:32
	the relationship of their currencies to the dollar	12:38
	and to the official price of gold,	12:43
	or whether the same result comes about	12:45
	by President Nixon's earlier suggested method	12:48
	that all the adjustments be on the part	12:52
	of the countries abroad.	12:54
	If it will still come to the same thing,	12:56
	and in the long run,	12:58
	the vested interests of real things	13:00
	are more important than the ideological	13:02
	symbolisms and superstructures	13:05
	of how things are to be done.	13:07
	Let's be hopeful, then,	13:12
	that that particular stumbling block will be out of the way.	13:15
	I am less hopeful, and now I'm repeating myself,	13:20
	I am less hopeful that the import surcharge	13:23
	can be removed, will be removed,	13:27
	by agreement of the United States authorities	13:31
	as soon as the club of 10, the club of more than 100,	13:33
	reach an agreement to do some of the things on parities	13:39
	which the United States wants them to do.	13:43
	I say this sadly.	13:47
	Secretary Connally has spoken in public,	13:51
	and no doubt in private,	13:55
	to the effect that we must first have the	13:57
	needed, desired improvement in the balance of payments	14:01
	before the surcharge can be removed.	14:05
	That's asking a great deal of the American allies,	14:08
	that they shall agree to put into effect	14:11
	rather extreme appreciations of their currencies,	14:15
	as it must look to them,	14:19
	that they must agree to be on the target path	14:21
	towards reducing their export business.	14:26
	But although they make these commitments	14:31
	to the contingent future,	14:35
	irrevocably, we in the United States do so	14:38
	with our fingers crossed, and saying,	14:43
	"We'll see how it'll all work out,	14:45
	"and if it works out all very nicely,	14:46
	"then we will reward you after the fact	14:49
	"with the removal of the surcharge.	14:51
	"But until we can be perfectly safe in knowing	14:53
	"that this therapy will work,	14:57
	"we cannot take the risk of removing the surcharge."	15:00
	That does seem to me to be rather asymmetric,	15:05
	and I say as a	15:10
	American citizen, as an American economist,	15:14
	and as one interested in both the welfare	15:17
	of the United States and of the world that	15:21
	I hope we will show more give	15:25
	in this particular regard.	15:29
	We still do not find	15:34
	unity among the club of nine,	15:37
	the non-Americans.	15:42
	There is	15:46
	dissension within the rank of the Common Market countries	15:49
	as to just how the dollars	15:54
	which they now hold in superabundance	15:58
	are to be restricted.	16:01
	For example, if the Common Market currencies,	16:04
	six of them, say, at the present time,	16:09
	are kept at equal,	16:11
	at unchanged pivots,	16:17
	I think they don't like to use the word parities	16:18
	because they like to think of parities	16:20
	in terms of the IMF relationships,	16:22
	but the internal parities, as I will call them,	16:24
	of the Common Market.	16:26
	If those are kept constant,	16:27
	and if one particular country,	16:30
	let's pick one at random,	16:33
	let's say that Italy were allowed to sell its dollars	16:35
	in order to make up its deficits	16:40
	if it had deficits with the other five countries,	16:43
	this would in effect force other Common Market countries	16:46
	to take on these dollars,	16:52
	or lacking that,	16:54
	it would do something which the Common Market countries	16:55
	are not yet ready to face up to,	16:57
	which is, it would result in a clean float	17:00
	in which the dollar would depreciate further	17:03
	without intervention by governments.	17:06
	This clean float,	17:10
	much as it may be desired by Secretary Connally,	17:12
	who wishes a $13 billion improvement	17:15
	in our current balance overnight,	17:17
	is precisely what is feared by the Common Market countries.	17:19
	Even those members of the Common Market	17:26
	who are prepared to believe	17:29
	that sometime in the future,	17:31
	they must learn to live without their surplus,	17:36
	even they are not prepared to have the transition	17:40
	cause havoc overnight with their export industries.	17:44
	At best,	17:48
	they wish for a tapering down of their export surplus	17:49
	as the dollar floats downward at a very modest rate.	17:54
	Let's suppose that	17:59
	the	18:02
	Common Market currencies as a whole in equilibrium,	18:05
	in that final equilibrium,	18:10
	must appreciate 7%,	18:12
	I'm just picking a number out of a hat,	18:16
	call it 10% for rounding off,	18:19
	10% more than at the present time.	18:22
	The enlightened members of the Common Market	18:25
	who see the necessity for that	18:27
	are perhaps prepared to have that 10% figure	18:31
	and the export configuration,	18:35
	the import configuration that corresponds to it,	18:37
	take place over a five-year period.	18:40
	That's 2% per year.	18:43
	They are not willing to have it take place	18:46
	tomorrow or six months from now	18:49
	because of the havoc that that might	18:52
	cause to their export industries.	18:56
	And let's suppose for the sake of the argument	18:59
	that this 10% appreciation	19:01
	that comes about in the longer run,	19:03
	intermediate longer run,	19:06
	does give Secretary Connally	19:08
	the improvement in the American balance of payments	19:10
	which he feels that we need.	19:12
	I may say that I think his big numbers	19:15
	are in the right direction,	19:17
	although I'm not sure about what he has,	19:19
	maybe for bargaining purposes,	19:22
	in muttering about 13 billion,	19:24
	rather overstated the ante of what is needed.	19:27
	But let's suppose that would create	19:30
	that amount of improvement.	19:32
	What's desired by the Common Market countries	19:35
	is an unclean float,	19:37
	a stabilization of the dollar by these countries	19:39
	during the interim period of, let's say five years.	19:44
	But I'm sure what they hope is	19:48
	that there will be agreement with the United States	19:51
	that the dollars which they accumulate	19:53
	during this transitional period in supporting the dollar	19:55
	should not represent losses to them	19:59
	as those dollars are being marked down,	20:03
	but rather, they should be compensated in paper gold,	20:05
	in special drawing rights.	20:09
	In other words, they should really have a guarantee	20:11
	for those dollars.	20:13
	That means in effect,	20:14
	the United States is taking the loss	20:15
	upon these transactions.	20:20
	Now, I don't know whether the world could live	20:23
	with absolutely precise and certain knowledge	20:28
	that the dollar is going over a five-year period	20:33
	to depreciate relative to all the Common Market countries	20:39
	on a straight line,	20:44
	which every speculator and every investor	20:45
	and every trader can know about.	20:47
	You may say that 2% per year is not very much,	20:50
	and that needn't create an avalanche of speculation,	20:53
	but my suspicion is that,	20:57
	unless we can twist interest rates	21:00
	and twist forward market exchange rates,	21:02
	that a 2% opportunity like that	21:07
	which was an absolutely sure thing	21:09
	could result in margined investments	21:11
	which would promise the speculators returns of,	21:16
	I'm just picking numbers out of a hat,	21:21
	maybe 70% per annum.	21:22
	I think that at returns like 70% per annum which are sure,	21:24
	you will get an avalanche of speculation	21:29
	which no concerted agreement	21:33
	among even six of the most powerful nations in the world	21:36
	with the promise from the IMF and from the United States	21:41
	to share a part of the losses that could be withstood.	21:44
	So often, in competitive markets,	21:49
	that if a price has got to be somewhere in the future,	21:52
	then it's got to be near there in the present.	21:56
	I say near there because one does have to allow	21:58
	for interest charges and some other	22:01
	carriage transport charges	22:06
	of holding the positions through time.	22:08
	Therefore, I want to express some apprehensions	22:14
	as to whether that nice, neat system	22:19
	of delayed adjustment would work,	22:22
	and yet, I think that something in that particular direction	22:26
	does need to be worked out.	22:31
	As long as I'm talking about the token adjustment	22:35
	in the price of gold,	22:38
	let's realize that	22:39
	I respect the wishes of the IMF.	22:43
	I respect the wishes of the nine of the club of 10,	22:45
	all of whom have agreed that that's what they want.	22:49
	But realistically,	22:52
	I know that many of those in the club of nine,	22:54
	let's say other than France,	22:59
	there might be one or two others,	23:01
	do not really	23:04
	have a strong need for this particular position.	23:07
	Let me illustrate.	23:11
	The Japanese have come out in favor of the United States	23:13
	doing something in the way of	23:18
	revaluing official and paper gold.	23:20
	The main reason believe why the Japanese have done this	23:25
	is that they have plenty of problems	23:28
	with the intransigent American position.	23:32
	And so, they really want to ally themselves	23:34
	with the Common Market countries,	23:37
	and if I were the Japanese, I would do the same.	23:39
	But I don't think that when one examines	23:42
	the interests of the Japanese,	23:44
	how much gold they have,	23:45
	what their need is to have their international reserves	23:48
	marked up by a change in the price of gold,	23:53
	if they have much of a stake in this.	23:56
	They're just doing it, if I may put it crudely,	23:59
	because the Americans don't want it done.	24:02
	They are identifying themselves	24:05
	with the other people who are against the American position.	24:07
	Very little in the end	24:13
	will be solved by our making this adjustment,	24:15
	but nevertheless, since it's so unimportant an adjustment,	24:19
	I think that it should be made.	24:21
	Let me add that most American economists	24:24
	who have been testifying also think the same thing.	24:29
	There are some notable exceptions.	24:33
	Dr. Roosa, who was undersecretary	24:36
	in the Dillon-Fowler treasury of Kennedy and Johnson	24:41
	has said, "Gold is a barbaric instrument.	24:47
	"We want to abandon it in the end.	24:50
	"Let's therefore not cater	24:53
	"to the illusions of the world	24:56
	"that gold is something important by raising its price."	24:59
	Dr. Friedman, in his testimony before	25:02
	the Joint Economic Committee on September 23rd,	25:04
	said that it's very unimportant,	25:10
	I hope I'm quoting him correctly,	25:11
	but he was against anything which prolongs illusions,	25:13
	and therefore,	25:18
	he was not particularly for raising	25:19
	the official price of gold.	25:22
	I believe that whatever force there is	25:26
	to the American position,	25:30
	and I'm now not talking about	25:32
	the official American position,	25:33
	but the kind of position	25:34
	that I've been representing here,	25:36
	and which coincides very closely	25:39
	with that of most American economists	25:42
	and many economists abroad,	25:45
	that whatever the merits of that position may be,	25:47
	that we will have the most influence	25:51
	in the deliberations of the world and of the IMF	25:53
	in persuading the rest of the world	25:57
	to move in that direction.	26:00
	There are plenty of economists abroad	26:02
	who want the world moved in that direction	26:03
	if we don't antagonize the rest of the world	26:07
	on this very unimportant, inessential feature.	26:10
	My time is almost up,	26:16
	so let me now very hastily give a bird's eye view	26:18
	of what's been happening to the domestic economy	26:22
	under President Nixon's NEP.	26:24
	We will never settle the argument, it can never be settled,	26:27
	whether the old game plan was working satisfactorily or not.	26:31
	You know my opinion.	26:35
	My opinion is that it was not working satisfactorily,	26:36
	and we are getting more and more of the July and August	26:39
	statistics on the American economy,	26:43
	and most of those are very depressing.	26:45
	For example, in August,	26:49
	the leading indicators for the first time	26:52
	since the settlement of the General Motors strike,	26:54
	for the first time since	26:57
	the current business cycle expansion started,	26:58
	they actually went downward.	27:01
	Not surprising in view of the strike aftermath in steel,	27:03
	but whatever strength there was in the second quarter	27:09
	must be attributed in part precisely to that strike.	27:14
	The Federal Reserve Board index of production	27:18
	is still, in August,	27:20
	below what it was in January.	27:23
	Even granting that we had a very shallow recession,	27:27
	this is a very anemic recovery.	27:32
	Wholesale prices are behaving badly.	27:36
	Fortunately, with respect to food,	27:38
	we've had some very good crops in the United States,	27:40
	and this will help the consumer's price index in the future.	27:42
	Let me conclude by saying that,	27:49
	even though so many of the forecasters have,	27:52
	as a result of NEP,	27:57
	greatly revised upward their forecasts for the future,	27:59
	business in America, except in the field of automobiles,	28:06
	has not yet shown any real appreciable influence of NEP,	28:11
	and so,	28:17
	I stand by the view	28:18
	that NEP is going to add	28:20
	to what would otherwise have been the case in 1972.	28:23
	But you still cannot bet on a raging real output expansion,	28:27
	and certainly don't bet on control of inflation.	28:33
-	If you have any comments or questions	28:37
	for Professor Samuelson,	28:39
	address them to Instructional Dynamics Incorporated,	28:40
	166 East Superior Street, Chicago, Illinois, 60611.	28:43

Item Info

Title:

Tape 86 - European viewpoint of Nixon economic policies

Date:

1971

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

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Limited Re-Use

CC BY-NC 4.0

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Identifier:

RL10082-CS-0086
ref2311_ea2
samuelsonpaul
duke:325109
pstau001086
ark:/87924/r4bn9xk1d
b6488d5a-9d76-41ee-b8bf-7b78addbf214

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https://idn.duke.edu/ark:/87924/r4bn9xk1d

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Tape 86 - European viewpoint of Nixon economic policies

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Item Info

Economists' Papers Archive

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