Tape 4 - untitled
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- | Hello. | 0:02 |
Instructional Dynamics Incorporated | 0:03 | |
welcomes you to this week's commentary | 0:05 | |
and the current economic scene. | 0:07 | |
Reporting to you will be one of the nation's | 0:09 | |
leading economist, Professor Paul Samuelson | 0:11 | |
of the Massachusetts Institute of Technology. | 0:13 | |
Professor Samuelson, what is the big news | 0:16 | |
in the economic front this week? | 0:18 | |
- | The biggest economic news of the week | 0:21 |
I think is the news that didn't happen. | 0:23 | |
I refer to the fact that the Paris Peace Talks on Vietnam | 0:26 | |
are temporarily marking time. | 0:29 | |
The biggest news that did happen | 0:32 | |
is the continued run on the franc. | 0:34 | |
No one knows whether the franc will be toppled | 0:36 | |
and have to devalue, but I'd hate to be betting | 0:38 | |
against that happening right now. | 0:41 | |
If it does happen, | 0:43 | |
the pressure will turn toward the British pound | 0:45 | |
and you know my view that the dollar | 0:48 | |
is not yet out of the woods. | 0:50 | |
Finally, the first signs of a slow down | 0:52 | |
in the period following fiscal restraint | 0:56 | |
are beginning to come in. | 0:58 | |
Retail sales are not quite so zoomy, | 1:00 | |
personal income less than October | 1:02 | |
because of less exuberance in private payrolls. | 1:05 | |
But obviously, one swallow doesn't make a spring | 1:09 | |
and we must wait before making any premature judgments | 1:11 | |
concerning the effectiveness | 1:15 | |
of fiscal and monetary restraints. | 1:16 | |
I'd like to return to the problem with the franc and mark | 1:19 | |
before I wind up today. | 1:21 | |
But first I think, you have been hearing | 1:25 | |
from some of our listeners. | 1:29 | |
Do you have a question there to throw at me? | 1:30 | |
- | Right, Professor Samuelson. | 1:33 |
One of our subscribers has sent along a question | 1:34 | |
involving several parts, which you might take up. | 1:38 | |
First of all, what are the possibilities | 1:41 | |
that gold might be revalued upward | 1:42 | |
in terms of the US dollar within the next year? | 1:44 | |
And do you think this should be or should not be done? | 1:47 | |
And if so, to what price should gold be revalued? | 1:51 | |
And if the price of gold or raised to say | 1:55 | |
$100 per ounce next week, | 1:57 | |
what effect do you think this would have on the stock market | 1:59 | |
and also the bond market? | 2:02 | |
- | Well, let me take the questions up in order. | 2:05 |
First, if there were to be a doubling of the price of gold, | 2:11 | |
I think it would have some very dramatic effects | 2:16 | |
upon the American stock market. | 2:18 | |
I think that inflationary expectations | 2:20 | |
would be much enhanced by it | 2:23 | |
and the immediate impact of a sudden surprise announcement | 2:25 | |
of a doubling of the price of gold | 2:30 | |
would be to have the Dow Jones index zoom to over 1000. | 2:32 | |
This is quite aside from the effect | 2:37 | |
upon particular gold stocks like | 2:39 | |
American South African Gold Mining Trust | 2:43 | |
and marginal Canadian gold companies | 2:47 | |
or South African companies | 2:51 | |
or Homestake gold mining within this country. | 2:53 | |
If stocks go up because of inflationary expectations, | 2:58 | |
I think it's a good bet that the bonds would go down. | 3:02 | |
So, if I thought that if were going to happen, | 3:05 | |
it would be the biggest news in the week that it did happen. | 3:09 | |
What are the possibilities of it's happening? | 3:13 | |
If Humphrey had been elected, I would have said | 3:17 | |
that the probability of a massive deliberate increase | 3:20 | |
in the price of gold by international agreement | 3:26 | |
within the next 12 months was nil | 3:29 | |
or let me be careful, let me say 5%. | 3:33 | |
In the case of Mr. Nixon, | 3:39 | |
I think the probabilities are still very low, | 3:41 | |
but I can't put them quite so low | 3:45 | |
because I know of at least one advisor of Mr. Nixon | 3:48 | |
who is on record in thinking | 3:54 | |
that an increase in the price of gold is an evil, | 3:56 | |
but it may be the lesser of other evils. | 4:01 | |
The conservative economics community generally | 4:06 | |
as represented by those much touted gnomes of Zurich | 4:11 | |
have at this point in my judgment, | 4:18 | |
by and large come to be of the opinion | 4:21 | |
that the price of gold should be doubled. | 4:24 | |
This is the goal position. | 4:26 | |
This is the position of one of his advisors, Jacques Rueff. | 4:29 | |
Dr. Rueff is an immortal, | 4:35 | |
that means he belongs to the French Academy. | 4:37 | |
He is considered by non economists to be a great economist. | 4:41 | |
I think I report correctly the consensus of economists | 4:47 | |
from within the economics profession | 4:52 | |
and our view is that he is a very pedestrian | 4:54 | |
and mediocre economist. | 4:59 | |
He has one idea and a lack of clock, which is standing still | 5:02 | |
and which turns out to tell the correct time twice a day. | 5:09 | |
When the world veers towards his one idea, | 5:13 | |
he looks to be correct and when it veers | 5:17 | |
away from that one idea, nobody pays any attention to him. | 5:19 | |
Well, he is in favor of doubling the price of gold, | 5:25 | |
but it's not because of Rueff's espousal, | 5:30 | |
that this proposition deserves our interested attention. | 5:34 | |
The Bank for International Settlements in Basel, | 5:40 | |
which I believe gives us a pretty good Gallup poll | 5:44 | |
on the consensus of central bankers | 5:48 | |
and of ordinary large international commercial bankers. | 5:52 | |
That group has, I believe, come to the opinion | 5:58 | |
that the price of gold should be doubled. | 6:00 | |
At least one New York banker has publicly made noises, | 6:03 | |
which I interpret to be saying | 6:10 | |
that we should follow this particular policy. | 6:12 | |
Now, I don't myself approve of this policy. | 6:16 | |
I did once in the Washington Post | 6:22 | |
and in the Paris Herald Tribune | 6:25 | |
on the eve of the March meeting in Washington | 6:28 | |
at which the two tier gold price system was set up. | 6:34 | |
I did on that occasion | 6:38 | |
not knowing the results of that meeting | 6:39 | |
come out for 24 hours in favor | 6:42 | |
of such a doubling of the price of gold | 6:45 | |
as the lesser of evils. | 6:48 | |
But I was too pessimistic and I had not realized | 6:51 | |
that the leading nine nations of the world | 6:55 | |
would have the courage to turn their back upon gold | 6:59 | |
in the way that they announced they were going to do | 7:03 | |
in Washington on March 17th | 7:06 | |
and in the way that they confirmed in Stockholm | 7:09 | |
at the end of the month of March | 7:13 | |
and in the way that they again confirmed | 7:15 | |
at the Rio meetings in September of the fund. | 7:18 | |
So, my own opinion is that this should not be done. | 7:25 | |
However, it is one neat way of buying time. | 7:32 | |
We never know what we're buying time for. | 7:39 | |
There are never any real movements towards adjustment | 7:42 | |
that I can discern after we have bought time, | 7:46 | |
but a massive increase in the price of gold | 7:51 | |
would certainly paper over some of the difficulties | 7:53 | |
of international finance for a certain period of time. | 7:56 | |
I personally would prefer a massive | 8:00 | |
once and for all increase in the price of gold | 8:02 | |
to a small increase in the price of gold, | 8:05 | |
which would only encourage gold speculators | 8:08 | |
to hoard more gold. | 8:11 | |
There was an interesting article last week | 8:15 | |
in the Wall Street Journal, I believe on Tuesday | 8:17 | |
telling about a typical gold hoarder in Switzerland. | 8:23 | |
He's a man of means. | 8:28 | |
He is a man who thinks that prudence requires | 8:30 | |
that a part of his portfolio be in the form of gold. | 8:32 | |
He perhaps is a man, not very fastidious | 8:36 | |
about paying his taxes. | 8:38 | |
He may be using numbered accounts in Switzerland | 8:40 | |
because he is avoiding various tax laws | 8:44 | |
and he may also be an outright violation | 8:47 | |
and evasion of tax laws. | 8:50 | |
And according to this account, he does not feel yet, | 8:52 | |
that he has been making a mistake in backing gold. | 8:57 | |
But the story is not finished. | 9:02 | |
He bought the gold typically | 9:04 | |
when the price was still pegged at $35 an ounce. | 9:07 | |
That was a sucker bet. | 9:10 | |
That was a bet where he couldn't lose. | 9:12 | |
It was a heads he wins, tails he will not lose. | 9:15 | |
If gold had not changed its price, | 9:19 | |
he's only out the money tied up in gold. | 9:23 | |
If gold does go up, he has a one way sure profit. | 9:28 | |
Now that we have the two tier price system, | 9:32 | |
you have to come in today and buy gold | 9:35 | |
at say $40 an ounce or there about | 9:37 | |
and there is no guarantee that it will not drop | 9:40 | |
to $38 an ounce to $37 an ounce to $35 an ounce | 9:42 | |
and for that matter, it could drop below that. | 9:47 | |
Now, you may say those are very small losses, | 9:50 | |
but remember the typical speculator who goes into gold | 9:52 | |
in the Zurich market is probably doing so on borrowed money | 9:57 | |
and with leverage. | 10:02 | |
And so if he finds the price of gold that he bought at $40 | 10:04 | |
are going down below $38 an ounce, he doesn't lose | 10:08 | |
two 40ths of his principal. | 10:11 | |
He loses 100% of his principal. | 10:14 | |
Well, we'll be saying a good deal about gold | 10:18 | |
in the weeks to come and at the end of this tape, | 10:24 | |
I hope to say something more directly | 10:29 | |
about the French franc situation. | 10:30 | |
But in the meantime, may I comment upon a reaction | 10:33 | |
that I received from one of my listeners, | 10:40 | |
a friend of many years standing | 10:45 | |
and a distinguished economist | 10:47 | |
who scolded me gently for a position that I took | 10:50 | |
a couple of weeks ago. | 10:54 | |
Two weeks ago, I explained that I was an eclectic. | 10:56 | |
That is one who had learned the hard way by experience | 10:59 | |
that the art of economic analysis | 11:04 | |
involves judicious blending | 11:06 | |
of the contributions of many different kinds of theories. | 11:08 | |
Well, I was scolded for this position | 11:14 | |
and let me try to give a fair paraphrase | 11:17 | |
of my listener's argument. | 11:21 | |
"To explain the slow down in the third quarter GMP growth | 11:25 | |
"from 21.7 billions down to 17.9 billions, | 11:29 | |
"one did not need to be an eclectic. | 11:34 | |
"Monetary theory by itself probably can explain this fact. | 11:37 | |
"For back between November, 1967 and April, 1968 | 11:42 | |
"there was a perceptible slowdown | 11:47 | |
"in the rate of growth of the money supply | 11:49 | |
"due to Federal Reserve policy and this fact alone, | 11:52 | |
"offers a non eclectic explanation | 11:56 | |
"of the third quarter's tapering off." | 11:58 | |
So that's the end of my paraphrase. | 12:02 | |
What am I to think about it? | 12:04 | |
Well, God knows I can use good advice | 12:07 | |
in improving my clairvoyance about the future | 12:09 | |
and my explanations about the past. | 12:12 | |
So I was doubly thrilled to be given this new way | 12:15 | |
of making my future GMP forecasts. | 12:18 | |
Why doubly thrilled? | 12:21 | |
First, because our students at MIT | 12:23 | |
are always writing master's theses | 12:26 | |
trying to find good ways of predicting GMP changes | 12:28 | |
from the money supply. | 12:31 | |
And so far, I'm sorry to say, | 12:34 | |
their results have been fairly mediocre. | 12:35 | |
Hence, the new formula is all the more valuable | 12:38 | |
by virtue of its rarity. | 12:41 | |
Second, it now gives me a way of generating numbers for GMP, | 12:44 | |
not only for the present uncompleted last quarter of 1968 | 12:49 | |
but even into the first quarter of next year. | 12:53 | |
All I have to do is to go to the shelf | 12:56 | |
where I keep data on money growth, | 12:59 | |
that the St. Louis Federal Reserve Bank | 13:01 | |
provides me at very frequent intervals | 13:03 | |
and I can apply the method. | 13:06 | |
And as a matter of fact, you listeners can do the same. | 13:08 | |
You hardly need to pay to hear me apply the art of judgment | 13:11 | |
to the passing business scene. | 13:14 | |
Let me share with you the results of my efforts. | 13:17 | |
I looked up the rate of growth of the money supply | 13:22 | |
from last November to last April. | 13:24 | |
I actually didn't have to make any calculations | 13:27 | |
because the Federal Reserve Bank of St. Louis | 13:29 | |
nicely provides me with the triangular mileage chart | 13:31 | |
that makes all such calculation | 13:35 | |
between any two months you care to ask about. | 13:38 | |
Well, I found that to be 4.4% per annum | 13:41 | |
rate of growth of the money supply | 13:44 | |
and indeed, that is a lower figure | 13:47 | |
than is shown for the same interval of time | 13:50 | |
centered three months earlier. | 13:52 | |
I'm actually not sure why my listener picked precisely | 13:55 | |
this lag of nine to four months to concentrate on. | 13:58 | |
Our master's theses generally use wider intervals | 14:04 | |
and with varying weights. | 14:07 | |
But no matter, let us follow the method proposed. | 14:09 | |
For the three months earlier, | 14:13 | |
the money supply grew at a 4.6% rate. | 14:15 | |
Well, I knew money was powerful, | 14:19 | |
but I had not realized that each wiggle of points | 14:21 | |
one tenths percent of its growth | 14:24 | |
was worth two billions of GMP growth. | 14:27 | |
But what does the method tell us about the present quarter? | 14:31 | |
The eclectic say GMP will grow | 14:34 | |
in this fourth quarter of 1968 by all 12 to 18 billions | 14:37 | |
and not very precise estimate. | 14:43 | |
I may add than most of the money supply interpreters | 14:46 | |
also have estimates in this range, | 14:52 | |
although two such experts in the Allegheny region | 14:55 | |
tell me that plus 11 billion is their indicated figure. | 14:58 | |
But let us see whether we can do better | 15:03 | |
by abandoning eclecticism. | 15:05 | |
The important number for us of course, | 15:08 | |
is how money grew in the interval centered | 15:10 | |
three months after the November-April period. | 15:13 | |
That works out to be a whopping 9.0%. | 15:17 | |
A vast jump over the 4.4% increase in the money supply | 15:21 | |
in the November-April period. | 15:25 | |
This would seem to imply at least a plus 25 billion in GMP | 15:27 | |
in the current quarter. | 15:33 | |
Even after I attenuate any estimate | 15:34 | |
based upon mere linear extrapolation | 15:38 | |
of what are after all, two very chancy numbers. | 15:42 | |
Well of course, no one believes | 15:46 | |
in any such plus 25 billion estimate or over 20 billion | 15:47 | |
and I've been keeping my tongue and cheek | 15:53 | |
in implying such a suggestion literally. | 15:55 | |
But for the record, let us see whether a broader definition | 15:58 | |
of the money supply to include time deposits | 16:02 | |
as well as currency and check deposits | 16:05 | |
would make better sense of the suggested method. | 16:07 | |
Briefly, the November-April figure is 5.6% | 16:11 | |
rate of growth for the broader definition | 16:16 | |
of the money supply, and this is a drop | 16:20 | |
of 1.5% from three months earlier. | 16:23 | |
It is also more than 2% below the subsequent growth rate | 16:27 | |
of 7.9% in the broad money supply in the period centered | 16:31 | |
three months after the November to April period. | 16:38 | |
So even with the broader definition of the money supply, | 16:41 | |
if I do abandon eclecticism, I am led to the prediction | 16:45 | |
that the third quarter growth will be the lowest of the year | 16:49 | |
and that the current and next quarter | 16:53 | |
will show more rapid growth | 16:55 | |
than the 21.7 billion of the second quarter. | 16:57 | |
No bank economist I know now take such a view. | 17:01 | |
What is the moral? | 17:07 | |
Well, first I think I've shown that I'm so eclectic | 17:09 | |
that I'm even willing to abandon eclecticism | 17:12 | |
in favor of a monistic money theory | 17:15 | |
if it can deliver the goods. | 17:18 | |
Or if it can deliver the goods | 17:20 | |
better than my judgment models. | 17:22 | |
But for me, alas, such methods don't work well. | 17:24 | |
And in checking over the years with bank economists | 17:28 | |
who do rely much on the money factor, | 17:31 | |
I've discovered that their "practical judgment" | 17:35 | |
tells them how to shade the money factor. | 17:41 | |
It is like technical chart methods in Wall Street. | 17:45 | |
Most people I've found lose money from them. | 17:49 | |
A few technicians profit. | 17:52 | |
But these few cannot teach the art mechanically | 17:55 | |
to their sons-in-law and they combine the chart method | 17:59 | |
with their general flare. | 18:03 | |
As Voltaire said, witchcraft and arsenic | 18:06 | |
will kill your neighbor's sheep. | 18:10 | |
But until I can separate the ingredients, | 18:12 | |
I shall have to remain even more eclectic | 18:15 | |
than I was last week. | 18:18 | |
- | Professor Samuelson, what about the French franc? | 18:20 |
- | I spoke in earlier tapes about some of the problems | 18:24 |
of the French franc that are still present. | 18:30 | |
Let me say that in these discussions, | 18:34 | |
I shall never hesitate to be repetitive. | 18:38 | |
After all, I can't assume that any of us remember precisely | 18:42 | |
from week to week exactly what was said. | 18:47 | |
Furthermore, sometimes the same analyses and facts | 18:50 | |
need to be emphasized and to be reemphasized. | 18:55 | |
And finally, we all know as teachers and learners | 18:59 | |
that redundancy is a very important quality | 19:04 | |
in any process of communication. | 19:10 | |
I attribute the difficulties of the franc | 19:16 | |
primarily to events beginning last April. | 19:22 | |
Prior to this spring, the French franc was very hard. | 19:29 | |
General de Gaulle was pushing very strongly | 19:38 | |
in favor of increasing the price of gold. | 19:43 | |
He was resisting very strongly | 19:48 | |
the creation of special drawing rights | 19:50 | |
or so-called paper gold by the International Monetary Fund. | 19:53 | |
And General de Gaulle was riding high. | 19:59 | |
The French economy was doing very well. | 20:02 | |
He was the last person to suspect | 20:06 | |
that he was living on top of a seething volcano. | 20:08 | |
Once Redd Rudy led the students of the Sorbonne | 20:13 | |
into sit-ins and into revolt. | 20:18 | |
And once this caught like wildfire | 20:22 | |
among the French working population, | 20:26 | |
leading to various general strikes | 20:29 | |
and almost a breakdown of civil order in France, | 20:32 | |
the situation was completely changed. | 20:37 | |
This emphasizes once again | 20:42 | |
how in order to be a good economist, | 20:44 | |
you have to be a good political economist. | 20:47 | |
In any case, the chaos which followed upon this period | 20:52 | |
so shocked the bulk of the French people | 21:00 | |
that they turned in droves to de Gaulle. | 21:03 | |
I think we learned something here about revolutions. | 21:10 | |
If a Lenin could have been brought to France | 21:14 | |
in a sealed train following upon April, May and June | 21:17 | |
and if he had been able ruthlessly to get his way, | 21:24 | |
you could have had in a country like France, | 21:30 | |
a irreversible revolution, | 21:33 | |
not unlike that of the 1917 Russian Revolution. | 21:36 | |
For make no mistake about it. | 21:41 | |
If two or three weeks after the disorders in Russia in 1917, | 21:44 | |
Lenin had had to win a referendum and plebiscite | 21:50 | |
maintained under reasonable conditions of law and order. | 21:56 | |
Let's say no worst conditions and the counting of votes | 22:02 | |
in Cook County in Illinois | 22:04 | |
during one of our four-year elections, | 22:06 | |
then we might well not have had the Lenin Soviet System. | 22:10 | |
In any case, what was involved economically here | 22:19 | |
was a massive increase in costs for French business. | 22:25 | |
And this meant that if the French franc was properly valued, | 22:33 | |
vis a vis the mark, vis a vis the Gilder, | 22:40 | |
vis a vis the Swedish crown, vis a vis the pound sterling, | 22:44 | |
vis a vis the American dollar, | 22:51 | |
at its previous cost levels, these sudden increases in costs | 22:54 | |
probably accompanied by deterioration of efficiency | 22:59 | |
and productivity in the French plants, | 23:03 | |
would have meant a certain amount | 23:06 | |
of longterm trouble for the French franc. | 23:08 | |
But longterm trouble comes very much | 23:11 | |
in the short run in France because opinions there | 23:16 | |
are extremely volatile and we began to have a massive | 23:19 | |
speculative run against the franc, primarily by Frenchmen | 23:25 | |
but also by people of other countries. | 23:31 | |
This was helped along a little bit by a proposal to him | 23:36 | |
an inheritance tax in France. | 23:40 | |
A notion which shocks the petty bourgeoisie of France | 23:43 | |
who isn't even accustomed to taking | 23:49 | |
the payment of his income tax at face value. | 23:54 | |
If we add to this, the fact that the mark | 24:02 | |
has been so very, very strong | 24:05 | |
and so that there was a cool money businessman's risk | 24:08 | |
that the mark might appreciate, | 24:12 | |
we can fully account for the drainage | 24:15 | |
of international reserves from France. | 24:20 | |
France had six billion dollars of gold, | 24:24 | |
like King Midas, he sat upon it | 24:26 | |
and today, he has less than, | 24:29 | |
General de Gaulle has less | 24:32 | |
than four billion dollars of gold. | 24:34 | |
And this kind of hemorrhaging at this rate | 24:37 | |
cannot last for an indefinite time period. | 24:39 | |
It can't even last for three or four months. | 24:43 | |
Now the question is what can be done about it? | 24:46 | |
First, he will undoubtedly receive a great deal | 24:49 | |
of international loan support | 24:53 | |
from the Bank for International Settlements, | 24:56 | |
from the International Monetary Fund | 24:58 | |
and I must say it couldn't be more amusingly tragic, | 25:00 | |
than to see General de Gaulle coming cap in hand | 25:09 | |
to the IMF authorities | 25:13 | |
whom he has been so much castigating in the past | 25:16 | |
and now himself asking for aid. | 25:20 | |
Of course he would like to have the mark | 25:23 | |
appreciated once and for all | 25:25 | |
so that everybody can say this is it. | 25:27 | |
There is no longer any reason to send your money to Germany. | 25:29 | |
This is a good time to bring your money back to France. | 25:32 | |
The Germans with an election coming up | 25:35 | |
are not very anxious to oblige General de Gaulle | 25:37 | |
by putting in this politically unpopular move, | 25:41 | |
even though I may say, most of us think | 25:46 | |
it makes a great deal of sense. | 25:50 | |
Sense for the world, sense for Germany. | 25:52 | |
The Germans have just announced | 25:57 | |
that in place of an appreciation, | 26:00 | |
they will try to do by taxes | 26:03 | |
what an appreciation could be expected to do | 26:06 | |
for their balance of payments. | 26:10 | |
The Germans are exporting too much, | 26:12 | |
they're importing too little. | 26:14 | |
Therefore a tax upon exports | 26:16 | |
and to lower and protective duties on imports. | 26:20 | |
This is a step in the right direction, | 26:27 | |
but it seems to me an unnecessarily complicated step. | 26:30 | |
It would be better to accomplish the same thing | 26:33 | |
by appreciation, rather than to adopt | 26:37 | |
this piecemeal appreciation | 26:42 | |
via the tax system. | 26:47 | |
Such a measure if long continued is better than no change, | 26:50 | |
so long as the mark remains. | 26:55 | |
Well, sort of psychological mass movement that no | 27:00 | |
(mumbles) | 27:07 | |
on the basis of principles | 27:08 | |
and I see no reason to go out on a limb | 27:10 | |
in predicting that the French franc will be devalued | 27:13 | |
or the French franc will be devalued. | 27:16 | |
We'll know more about that probably next week. | 27:20 | |
- | Thank you very much, Professor Paul Samuelson | 27:24 |
of the Massachusetts Institute of Technology. | 27:26 | |
If you have questions or comments or suggestions | 27:29 | |
for topics you'd like to hear discussed in this series, | 27:32 | |
please send them to Instructional Dynamics Incorporated, | 27:36 | |
166 East Superior Street, Chicago, 60611. | 27:39 | |
- | How long did we go? | 27:46 |
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