Tape 94 - The international monetary situation

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-	Welcome once again as MIT Professor, Paul Samuelson,	0:02
	discusses the current economic scene.	0:05
	This biweekly series is produced	0:07
	by Instructional Dynamics Incorporated and was recorded	0:09
	January 24, 1972.	0:12
-	The most frequent question that I am asked now	0:16
	about the economic scene has to do with	0:20
	the aftermath of the currency agreements	0:24
	reached in Washington in December.	0:29
	There is a veritable war of nerves now taking place.	0:33
	The price of free gold in the Zurich markets	0:40
	moved early in January up to more than $46 an ounce.	0:43
	The expected reflux of speculative dollars,	0:52
	dollars for example held in Germany in the form	0:58
	of Marks in the successful hope of profiting	1:03
	from appreciation.	1:07
	Dollars primarily by multinational corporations	1:09
	but in part by individual speculators.	1:13
	Those dollars had been expected to be returning	1:17
	once the agreement was reached in great amounts	1:21
	in the billions of dollars; whereas, the fragmentary	1:26
	evidence now available suggests that perhaps only	1:29
	a billion of those dollars will come back.	1:33
	What do those dollars know that we don't know?	1:35
	Why are they holding off?	1:38
	I have even been getting transatlantic telephone calls	1:43
	frantically asking for any insight in this matter.	1:47
	The big question is, "Are the currency	1:54
	agreements, the parity adjustments, reached at	1:59
	the Smithsonian around December 18th working?	2:02
	Or are they already coming apart?	2:07
	Are we in a world recession? Will it get worse?	2:11
	Was the amount of dollar depreciation enough?	2:19
	Is the medicine going to work or was it insufficient?	2:22
	And you will not be surprised to hear	2:28
	at the same time that I am being asked	2:33
	whether the dollar depreciation was sufficient,	2:34
	I am also getting questions from intelligent opinion,	2:38
	here and abroad, asking, in view of	2:42
	a possible world recession, in view	2:46
	of a possible necessity for Germany and Japan and Italy	2:49
	to take domestic expansionary measures	2:53
	that will worsen their balance of payments.	2:58
	Is it possible that the dollar will have	3:01
	to be revalued in an upward direction?	3:03
	Was the currency depreciation agreed upon	3:07
	in Washington too much of a good thing?	3:12
	Well let me give you my opinion.	3:17
	First, I don't think that there is any question	3:24
	but that much of the world is now in a growth recession.	3:27
	A good deal of the slow down that was discernible	3:35
	in countries like Germany and Italy and Japan,	3:39
	had taken place before August 15th.	3:45
	Before the so called Nixon talk.	3:48
	Indeed, some of those countries looked to be	3:53
	coming out of their recession and the fairly	3:56
	active forecast, for example, from Japan	3:59
	suggested that looking ahead to the next fiscal year	4:04
	that Japan would begin to move back toward	4:08
	her targets of phenomenally rapid real growth.	4:11
	Naturally, the Nixon talk had it's toll abroad.	4:17
	The fact that the dollar was floating downward	4:24
	and those currencies were floating upward	4:29
	would tend to be a shock to business	4:32
	expectations in those countries.	4:36
	The fact that no agreement was reached	4:39
	the mere fact of floating even though it was	4:42
	primarily dirty floating and not clean floating	4:46
	scared business men.	4:50
	I reported in an earlier tape	4:54
	that the survey of business men's expectations	4:57
	in Japan took a more violent swing toward the downside	5:04
	than I have ever seen recorded in	5:08
	any such similar survey, where it be in	5:11
	Japan or whether it be in any other country	5:13
	in the modern epoch.	5:16
	Secretary Connally, toward the end of the period	5:20
	of uncertainty, ws not helping matters	5:24
	by going around the world and in a recalcitrant way	5:26
	giving ultimata as to the amount of the American	5:30
	trade balance improvement which the United States would	5:36
	insist upon before changing the import tax surcharge.	5:40
	And so, psychologically, and we have to give something	5:50
	to confidence, there was a worsening in	5:55
	the international business situation in the interval	5:57
	from August 15th to December 18th.	6:03
	Now we have a little more than a month since	6:06
	December 18th.	6:09
	What is the pattern of experience developing?	6:10
	I think it's fair to say in that month that	6:15
	the general pace of business abroad	6:22
	in, let us say, Germany, Italy, Japan	6:25
	and let us also add France now	6:28
	has shown some deterioration.	6:31
	You can particularly see this in orders,	6:34
	not only export orders but in capital goods orders	6:36
	in intentions to invest.	6:40
	Can this be the result of a correct perception	6:45
	that the dollar depreciation was either too great	6:51
	in December or too little.	6:59
	I think not, in fact, per the nature of the case	7:02
	that cannot be so. No experience could possibly	7:06
	have accumulated in one month which could	7:10
	add or subtract one jot from anyone's expectations	7:14
	on these matters.	7:19
	Moreover, it is a great mistake to think that	7:23
	there are some knowledgeable speculators in Zurich,	7:28
	or those who are free to speculate	7:32
	in the London gold market, who know something	7:35
	that we don't know and who are onto a good thing	7:38
	and therefore are accumulating long positions in gold.	7:42
	Quite the contrary, in the first place	7:48
	as we knew in Wall Street before the end	7:51
	of November before the Thanksgiving bottoming out	7:56
	of Wall Street that there was no sophisticated	7:59
	knowing opinion in Wall Street which saw trouble	8:03
	ahead for 1972 for the American economy	8:07
	sooner than knowledge of that trouble was available	8:12
	to the government and to the general group	8:16
	of informed experts. On the contrary,	8:21
	the market then was filled with nameless dread	8:24
	and as it went down, down, down it, for a short time	8:28
	of course, achieved a self fulfilling prophecy.	8:33
	So it is with the gold market.	8:38
	What makes the free market in Zurich tick?	8:40
	What makes it move up and what makes it move down,	8:44
	is, you must understand, not primarily	8:47
	the demand curves of dentists who use gold for inlays,	8:52
	the demand curve of jewelers who use gold	8:57
	for wedding rings and various decorative jewelry,	9:00
	it is not the demand curve for relays in electronic circuits	9:04
	nor is it primarily the supply conditions as determined	9:12
	by how much gold can be recycled of reclaimed	9:17
	or as determined by the Russian gold mines	9:22
	nor even the supply commissions of South African gold.	9:27
	The fundamental forces of supply and demand	9:34
	that operate upon a typical commodity	9:36
	whether it be cocoa or copper or sugar or corn	9:38
	or wheat, these are necessarily in the back ground.	9:43
	We are much more in a situation like that	9:48
	of the American and London silver market.	9:51
	These are speculators markets. These are markets that	9:55
	have a heavy overhang of supplies that are held	9:59
	only for the purpose of a price rise.	10:06
	Now it is very important that there be a rumor	10:11
	in Zurich which says that the South Africans	10:15
	are refusing to sell gold and are withholding gold.	10:18
	That rumor, if believed, sends up the price of gold.	10:22
	It so happens that the South Africans have denied	10:25
	that the flow of new gold that is coming from	10:29
	their mines has been diverted in any significant	10:31
	manner. I conclude, therefore, that when informed opinion	10:35
	begins to achieve evidence on the question	10:44
	of whether the dollar currencies, depreciation	10:47
	that were agreed upon and appreciations are wrong,	10:52
	are inadequate, are more than adequate.	10:57
	It will not come to us from that particular gold market	10:59
	and so I really attach no significance to the	11:04
	daydreaming of the avaricious speculators in the market.	11:08
	Let me not be misunderstood, it is possible	11:15
	that 5 years from now the price in the free markets	11:19
	could be twice $35 and ounce, twice $38 dollars and ounce,	11:23
	$76 dollars an ounce. That is certainly	11:30
	a possibility. But I say that what determines	11:32
	the fate of the currency agreement reached in Washington	11:38
	will not be resolved, will not be know at all	11:44
	for a period of two or three years	11:47
	because it is a well established fact	11:50
	of international finance that even if the medicine	11:52
	of exchange rate appreciation is going to do it's work	11:59
	and is going to do it's work perfectly to restore	12:02
	equilibrium in the balance of payments	12:05
	to the deficit country and correct the chronic surpluses	12:07
	of this equilibrium of the previously overvalued	12:12
	currencies, that medicine must take years to work	12:17
	and one months evidence is adds nothing to the jury	12:23
	that is waiting to make a decision as to	12:30
	whether the depreciation was too much or too little.	12:33
	What we can say is this, "If there had to be	12:37
	a stabilization of currencies against continued	12:41
	floating, no responsible jury of experts	12:43
	in international finance could have agreed	12:48
	that the dollar should have been depreciated more	12:52
	relative to the Yen, relative to the Mark,	12:56
	relative to the average of the other currencies	13:00
	than was agreed upon in Washington.	13:02
	Indeed, the bulk of the so called international experts	13:07
	have tended to be optimists in technical economics	13:12
	called elasticity optimists, people who believe	13:18
	that a rather small depreciation of the dollar	13:23
	ought to be enough, given time,	13:27
	to achieve equilibrium once again.	13:30
	Even a elasticity pessimist, relative pessimist,	13:37
	like myself, must agree that the German and	13:41
	the Japanese rather handsomely are giving this whole	13:46
	operation a chance. And so I repeat,	13:50
	if the experiment turns out to be a failure,	13:56
	we shall only learn about that gradually	14:00
	over the months and years ahead.	14:03
	What is it that we should be looking out for	14:06
	in judging how the experiment works out?	14:09
	First, if the depreciation was not enough	14:13
	it would show itself by a very slow	14:18
	improvement in the US balance of payments.	14:22
	It would show itself in the dollar being	14:25
	chronically and not trasiently at the bottom	14:28
	of the widened range permitted for its fluctuation	14:33
	relative to other currencies or to put	14:38
	the matter the way it will look abroad,	14:41
	it will show itself by the principle currencies	14:44
	of the world freely floating to the upper point	14:47
	of their permitted range. Their two and a quarter	14:51
	percent permitted range and if this persists	14:53
	month after month, and really, year after year	14:59
	then people in Zurich and in New York and in London	15:05
	will begin to have rational reasons for thinking	15:09
	that perhaps the depreciation was not enough.	15:13
	I hope before then, we shall have got on to	15:16
	the undecided question in Washington of what to do	15:20
	about the convertibility of the dollars that	15:23
	continue to go abroad and which we know	15:26
	must continue to go abroad even if the medicine	15:28
	is working and perhaps more importantly by then	15:30
	we shall have agreed on some measure	15:35
	of structural reform of the Bretton Wood System	15:42
	towards a gliding band. Towards some kind of crawling peg.	15:45
	And I would not consider it a defeat	15:51
	for anyone in the world if at the end	15:56
	of three years, it was decided that the Washington	16:00
	agreement required still further gradual flexibility	16:06
	of the exchange rate up or down.	16:14
	If for example, under a gliding band arrangement,	16:17
	let me just spell that out, that's an arrangement	16:23
	whereby the existing parity can be changed	16:26
	by one percent or two percent so that the whole band,	16:32
	two and a quarter percent above and two and	16:36
	a quarter percent below, can reform itself	16:38
	one or two percent lower. If the dollar should move	16:42
	further towards depreciation, that would not be	16:49
	a sign that the December agreement had been wrong,	16:53
	it would be a sign of how important the December	16:58
	agreement was because think how badly things	17:01
	would have worked themselves out if we had continued	17:05
	to peg the dollar at the old level.	17:08
	This enables me to turn to the opposite fear.	17:13
	If there is recessionary tendencies abroad,	17:17
	and if as I believe, in the age after Keynes,	17:21
	the countries abroad know what to do about it	17:25
	and will have the will to do it needed to do about it.	17:27
	Namely, to engineer domestic monetary expansion	17:31
	and if they all do it simultaneously,	17:35
	they will not run balance of payments deficits	17:37
	against each other, although it can be expected	17:39
	that they will begin to run smaller surpluses	17:44
	against the United States.	17:47
	If it should turn out that the measures needed	17:51
	to restore prosperity abroad were so great	17:54
	that the surpluses abroad against the dollar	17:57
	were to over shoot and move to deficits	18:02
	then that would show itself but it will only	18:05
	show itself after months and even years in which	18:08
	the foreign currencies float downward	18:12
	no transiently but chronically down at the lower	18:16
	points in their band and if three years from	18:20
	now it should turn out that we did overdo things	18:23
	in dollar depreciation in Washington	18:28
	and if we have a systematic gliding band	18:30
	and if it should be that the dollar	18:33
	would be revalued upward relative to other	18:36
	currencies gradually, again I would not think this	18:38
	is any reflection upon the wisdom of those people	18:42
	who met and decided at Washington.	18:44
	I think therefore that the message I can	18:49
	give you today is a fairly cheerful one.	18:53
	The jitters in the international market	18:57
	are mostly jitters. They are mostly nameless	19:00
	dreads. When a United States treasury department	19:04
	official denies that we have in mind	19:08
	to double the price of gold.	19:10
	You may say to yourself as a weary and sophisticated	19:13
	man of the world, "Oh that's what those fellows	19:15
	always say. Right up to the moment of depreciation	19:17
	they can lie on these matters."	19:19
	I will not deny that convention of international finance.	19:21
	But I say to you, and if my evidence is worth anything	19:27
	that no jury of informed inside experts	19:32
	think that that denial by the treasury	19:37
	is anything but the truth and there have	19:39
	been a lot of earlier occasions when I have thought	19:41
	that Anderson papers and Ellsberg papers	19:43
	are correctly revealing to us that governments	19:47
	are not in their public utterances	19:50
	sticking closely to the truth.	19:53
	It is a hundred to one bet that the United States	19:56
	will not in the next year, change the official price	20:01
	of gold at all and if you want to be a sucker	20:05
	and take one to a hundred bets with your valuable	20:08
	money then I doubt that you will receive	20:11
	much benefit from listening to takes like this.	20:15
	It's only at a later stage, two or three years from now,	20:18
	when the kinds of signs that I have been discussing	20:22
	with you develop fully that it could be that	20:25
	we would learn the truth of the hypotheses	20:30
	that underlie some of these particular rumors.	20:34
	Now I don't want to be a Pollyanna on the world	20:38
	recession.	20:41
	The rest of the world in a mixed economy	20:44
	is certainly due to have recessions at one	20:48
	time or another and the groundwork has been	20:53
	laid for a pretty good one and there is no	20:56
	particular reason why the Germans should snap back	20:59
	from this one in the remarkable fashion in which	21:02
	they have snapped back from a number of earlier ones.	21:06
	So I should like to give you soft words	21:10
	and soothing syrup that prosperity is just around	21:14
	the corner abroad.	21:17
	I will merely conclude with the observation	21:18
	that we do live in the age after Keynes,	21:25
	we do have the economic knowledge	21:28
	and what is more important, in all of these	21:31
	countries, the countries of continental Europe and Japan,	21:34
	we are essentially in populist democracies.	21:40
	We are in democracies which have electorates that will	21:45
	not stand for chronically high amounts of unemployment.	21:49
	We have electorates which are much more likely	21:55
	to countenance and contrive creeping inflation	21:58
	than electorates who will countenance deepening	22:03
	economic slumps and so having the knowledge	22:07
	and having the will to use the knowledge,	22:11
	I'd think that we must bet that the forces	22:13
	of government will be used abroad to counter	22:20
	any deepening recession and that is why, I say,	22:25
	that anyone who goes to Lloyd's of London and wishes	22:30
	to pay a heavy price for an insurance premium	22:33
	against a repeat of 1929 to 1933, anyone	22:35
	who has nightmares of the failure of	22:42
	the Creditanstalt Bank in Austria	22:46
	precipitating a universal world monetary slump	22:48
	and thinks that we are ready to have a replay	22:55
	of that in the 1970s, I say that 40 years have gone by	22:58
	and in those 40 years the fundamental background	23:01
	odds have changed.	23:07
	Any prudent man who is trying to forecast the future	23:09
	who is trying to husband his capital resources	23:13
	had better go with the odds and not go against the odds.	23:16
-	If you have any comments or questions for	23:20
	Professor Samuelson, address them to	23:22
	Instructional Dynamics Incorporated	23:24
	166 East Superior Street	23:26
	Chicago, IL 60611	23:28

Item Info

Title:

Tape 94 - The international monetary situation

Date:

1972

Contributor:

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

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audiocassettes

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English

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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 94 - The international monetary situation

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