Tape 206 - Western Europe; poor Britain-an endangered "snake"; a solid German mark; shaky French economy

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David	Hello, this is David Francis,	0:02
	financial editor of the Christian Science Monitor.	0:04
	I'd like to welcome you once more	0:07
	on behalf of Instructional Dynamics Incorporated to a visit	0:09
	with MIT's Nobel Prize winning economist, Paul Samuelson.	0:13
	It is now early October and because of travels	0:18
	by either Dr. Samuelson or myself,	0:22
	we have not been able	0:25
	unfortunately to tape a commentary for a few weeks.	0:26
	Dr. Samuelson, you are just back from Western Europe.	0:30
	Where more precisely did you go and what did you do?	0:34
Dr. Samuelson	Well I went to Brussels	0:38
	for the primary purpose of getting an honorary degree.	0:41
	The Catholic University of Louvain	0:46
	is now 550 years old and such occasions	0:49
	it seems to be standard to have convocations	0:53
	and dress up in gaudy outfits,	0:57
	give degrees and order scouses and so forth.	1:02
	But although that was my primary purpose	1:06
	it provided me with the occasion	1:10
	for a round table	1:12
	in the new University of Louvain	1:16
	with Alexandre Lamfalussy from	1:21
	the Basel Bank for International Settlements.	1:25
	And a representative of the Belgian government treasury	1:30
	and a representative from the research department	1:33
	of the Central Bank of Belgium.	1:37
	And in addition,	1:41
	I was able to conduct some scientific seminars	1:44
	and to talk at the American Embassy	1:46
	with Members of Parliament.	1:50
	So I thought it was a very exciting time	1:52
	fall of 1976 to be in Europe	1:56
	because an awful lot was happening	1:59
	in that over the weekend as I was returning,	2:01
	I wanted to have a look at Britain	2:06
	and just at that time unrelated I trust to my own travels	2:08
	the pound was falling very badly.	2:14
	Just to illustrate, on Saturday of the weekend	2:19
	I had a very good meal at a restaurant,	2:22
	I wanted to pay with American travelers checks,	2:26
	I said what rate do you allow?	2:29
	And they said a dollar sixty-nine	2:32
	and I said well you've made a mistake	2:34
	because the pound closed on Friday	2:36
	at a dollar seventy, dollar seventy-one,	2:40
	dollar seventy-two, don't cheat yourself, I said.	2:43
	But I think they had made a mistake	2:47
	but if you actually interpolated	2:50
	between the closing time Friday	2:53
	and the opening price on Monday	2:57
	then the price which they were trying to quote me	3:00
	in which I was resisting on their behalf	3:04
	would have been a nice interpolation	3:06
	because the pound dropped several cents	3:09
	reaching its all-time low of a dollar sixty-four	3:13
	until the British government announced	3:17
	its request for a new 3.9 billion dollar loan from the IMF.	3:21
	At which point the short speculators	3:25
	got a little bit of a beating and the pound stabilized	3:28
	for about three cents and I think that the last few days	3:32
	that's where it's been.	3:35
David	What do you believe is the cause	3:37
	of this drop in the value of the pound?	3:39
Dr. Samuelson	The approximate cause was a seaman strike	3:41
	which reignited the doubts	3:49
	and here we must look to the background causes.	3:53
	Doubts as to whether the new Labour government,	3:56
	new Prime Minister would be able to stabilize the economy.	3:59
	Whether the trade union constituents of the Labour Party	4:04
	would agree on the measure of wage restraint	4:09
	that Denis Healey the new Chancellor of the Exchequer	4:16
	had called for.	4:22
	No doubt the broader problem is the fact that	4:25
	the rate of increase in prices in Britain as in Italy	4:31
	is just about twice the rate of increase	4:37
	in prices in the United States.	4:41
	And maybe three times the rate of increase	4:43
	in prices in Germany and maybe four times	4:46
	that in Switzerland.	4:50
	And so a student of purchasing power parody	4:52
	that is a student who believes that in the longer run	4:57
	if one country has a monetary policy and a fiscal policy	5:02
	and a price level result	5:12
	which represents a doubling of its prices relative	5:15
	to the prices of another country	5:18
	then in all likelihood it's a good bet	5:20
	that its exchange rate will have	5:23
	and that particular theory is certainly	5:27
	part of what's happening.	5:32
	Unfortunately, you get because of the anticipations	5:33
	of investors, speculators, traders, observers,	5:40
	you get currencies that run ahead and behind of the par	5:44
	given by purchasing power parody	5:49
	and is modified by other factors.	5:53
	In Belgium, in the low countries generally	5:56
	you had not so extreme a case as that of Britain and Italy	6:02
	nor did you have as extreme a case on the other side	6:08
	as Germany and Switzerland.	6:14
	The Belgians were in an uncomfortable	6:16
	liaison with the Germans who do so much better as exporters	6:20
	and as controllers of their wage cost and price levels	6:26
	than the Belgians do so that the Belgians I think	6:32
	were feeling a bit stretched.	6:36
	The snake of course is the slang term we give	6:39
	for the agreement between the common market countries	6:46
	that their exchange rates will maintain a parity	6:51
	one with the other except for a little plus	6:57
	and a little bit minus.	7:00
	The thickness of that plus and minus	7:02
	is the width of the snake's body.	7:04
David	I hear the snake's been sort of	7:06
	an endangered species in the last few days.	7:08
Dr. Samuelson	Yes it keeps saying don't tread on me.	7:11
	(laughter)	7:13
	Because it feels that events are treading on it.	7:14
	Now since Germany has controlled its price level better	7:19
	or at least since its prices have been behaving better	7:28
	than its partners in the snake,	7:31
	let's say the guilder and the Belgian franc.	7:34
	It's not a surprise that the Belgian franc	7:40
	is right at the belly of the snake	7:46
	and looking at it from the standpoint of Germany,	7:48
	Germany is at the back of the snake.	7:52
	Well, unfortunately as long as long as you maintain	7:55
	the snake's width that's as far as the Belgian franc	7:59
	is allowed to depreciate.	8:05
	And although the Germans can live	8:08
	with the nice brisk high price	8:12
	that the free market puts on the Mark	8:16
	the Belgians have to also live with that	8:20
	given only the leeway of the body of the snake	8:26
	which is a very small leeway.	8:29
	And so they are finding that their exports	8:31
	are languishing a bit and it's showing itself	8:37
	in an increase in the amount of unemployment	8:40
	in comparison to what they are accustomed to.	8:43
	Now the first naive or sophisticated question	8:47
	that an American like myself naturally asked	8:52
	was, why do you crucify yourself	8:54
	on staying as part of the snake	8:59
	when it's so costly to you in terms of	9:02
	what's happening to your export surplus	9:05
	and what's happening to your unemployment situation?	9:07
	And they were remarkably uniform	9:12
	in the answers that they tended to give me.	9:15
	Now you must realize that the head of the central bank	9:18
	in an embassy lunch is not going to reveal to me	9:21
	every misgiving that he may have	9:27
	in the privacy of his own boudoir.	9:29
	These are explanations and rationalizations	9:32
	for public consumption but I got the same rationalizations	9:37
	from the research people of the Belgian government agencies	9:44
	and the Central Bank and in a slightly less measure	9:53
	from the academics at the university	9:59
	and the chap from the Bank for International Settlements	10:01
	who might be a little bit freer to speak his own mind.	10:04
	He in a measure agreed.	10:09
	So let's see what this parity line is that explains this.	10:11
	I ask, why do you do this and why do you in particular	10:14
	lose reserves in helping to keep	10:23
	at this lower belly of the snake and why do the Germans	10:29
	absorb as much in the way of Belgian francs	10:34
	pretending that they are just as good as Marks,	10:37
	is the game worth the candle?	10:42
	And the answer that they give is first,	10:45
	well let's look at the countries that have utilized	10:48
	their freedom to float, who have broken away	10:51
	from the snake, broken away from stable exchange rates	10:56
	vis-a-vis their European counterparts.	11:00
	Which would you rather be they said to me.	11:04
	Would you rather be an Italian, a Frenchman,	11:06
	a Englishman or a representative of their governments,	11:13
	a financial expert for them?	11:20
	Or would you rather be a German or a Swiss?	11:22
	Well I pointed out of course this in the give and take	11:30
	of friendly round table with a audience	11:33
	of men of business and bankers and students,	11:38
	I pointed out that that was not a fair comparison	11:43
	that the difference between Britain and Switzerland	11:46
	wasn't whether one simply adhered	11:49
	to fixed exchange rates and the other didn't.	11:53
	Rich men drive Mercedes and Cadillacs	11:59
	but if an impoverished bank clerk goes out	12:02
	and blows his net worth on a Cadillac Rolls or Mercedes	12:07
	that doesn't make him a rich man	12:12
	so this argument was not really worthy	12:15
	of a careful academic discussion.	12:19
	Well then we got I think to more of the heart of the matter	12:23
	what they said was that	12:27
	there's no substitute for discipline,	12:29
	macro economic discipline.	12:32
	The central bank must not create too much money,	12:34
	there are strong pressures on it to do so.	12:37
	The treasuries of any country must not	12:39
	undertake too much steps of financing,	12:44
	there are tremendous political pressures on it to do so.	12:46
	One of the resistances,	12:51
	the disciplining factors in the institutional situation	12:53
	is the adherence to stable exchange rates	12:58
	with respect to some more stable economy	13:03
	like the German or the Swiss economy	13:06
	and therefore they said that uncomfortable as the snake was	13:10
	they intentionally were adhering to it.	13:17
	Well the natural answer to that is,	13:22
	can you really afford to do it?	13:26
	Why blow billions of dollars of reserves as Britain	13:30
	is about to do on new borrowed money from the IMF,	13:37
	in defending what may turn out to be the indefensible?	13:40
	You won't in the end have the discipline anyway	13:44
	because the German Mark will appreciate in the end	13:45
	vis-a-vis the Belgian franc and the Dutch guilder	13:50
	and similarly vis-a-vis the pound, the lira	13:55
	and the French franc, the currencies	14:02
	which are no longer in the snake	14:05
	which were once in the snake.	14:06
	Why not get the relief that comes from	14:09
	letting the exchange rate appreciate?	14:14
	And then the next line of argument which they gave was,	14:15
	you don't understand, we are a small country,	14:20
	a very large part of our wage goods come from abroad.	14:24
	As we depreciate our currency instead of getting	14:29
	the short run advantage which a large country	14:33
	like the United States can get	14:38
	from a successful depreciation of the currency,	14:40
	in our small country, the immediate effect	14:44
	of a depreciation is to send up prices,	14:47
	particularly the prices of our import goods.	14:51
	The root of our trouble anyway,	14:57
	the reason we need discipline is that there's a tendency	14:58
	for our wages to be rising too fast.	15:02
	This depreciation of the currency	15:07
	is immediately accompanied by canceling out	15:11
	increase in wage rates.	15:16
	We are no better off then than we were before	15:19
	and we are just about ready to have an American come over	15:22
	and ask us why we don't depreciate further.	15:28
	This, they said is the Latin American way, the Balkan way,	15:31
	not worthy of a affluent Western country	15:37
	and we propose not to do it.	15:43
	Now I think privately they might admit	15:46
	that they hope that after the German election	15:52
	whoever was elected and when I was in Belgium	15:55
	nobody knew how the election we now know	15:59
	that the German Democratic Party squeaked through--	16:03
David	Social Democratic Party.	16:08
Dr. Samuelson	Social Democratic Party, Schmidt's party.	16:09
David	Yeah.	16:11
Dr. Samuelson	Squeaked through with a majority	16:12
	but instead of a majority of something like	16:15
	40 seats or whatever it was,	16:18
	it's now only about four or six seats.	16:20
	But their hope was that after the election	16:23
	whoever wins that maybe the snake could be reconstituted	16:27
	with the German Mark appreciated	16:33
	vis-a-vis the Belgian franc and the guilder	16:37
	and Luxembourg currency and the Danish krone	16:43
	and then again maybe now somewhere in the middle	16:48
	of the belly and the back	16:52
	you would have equilibrium forever.	16:55
David	In other words they would rather have	16:58
	the Germans take the political impact	16:59
	of having an appreciation rather than them devaluing.	17:03
Dr. Samuelson	Right.	17:06
	In particular they said that	17:07
	if they get the way you've just described unilaterally	17:11
	that in fact the dollar would follow the Mark	17:15
	and so it would be in effect a depreciation	17:19
	of their currencies versus not just the Mark	17:24
	which is what some of them might admit privately	17:27
	would be a desirable thing	17:29
	but against all the major currencies of the world.	17:31
	With the Mark not appreciating vis-a-vis the dollar	17:34
	same thing by the way might still be the case	17:37
	if the Germans hit the volition.	17:39
	Well unfortunately, I read in the paper just recently	17:41
	following the election that Schmidt has said	17:47
	he has no intention of appreciating the Mark.	17:50
	I must say I hope that is not the case	17:55
	that is I hope that this doesn't remain his view	17:58
	through thick and thin because very often	18:02
	it's in the interest of Germany to appreciate the Mark	18:07
	if it's still in undue surplus	18:10
	and it's in the interest of the rest of us	18:13
	to have them do so so I hope this doesn't firm	18:17
	into some kind of a doctrine on the part of the Germans.	18:21
	The Germans have in fact	18:28
	appreciated the Mark some distinct six to 10 times	18:33
	since early 1961	18:40
	at the request of the Kennedy administration	18:46
	they agreed to a 5% appreciation.	18:48
	This is quite aside from the floating upward	18:50
	that has taken place in the post-Smithsonian period	18:53
	in the ordinary day-to-day behavior of the exchange rates.	18:58
	And I think that Germany has benefited from that	19:04
	and I shudder to think of where the world would be	19:08
	if Germany had not been willing to do so.	19:12
	So I hope we haven't come to the end	19:14
	of that particular line.	19:15
	Let me just say a word or two about Britain.	19:19
	The British Labour Party has been having	19:23
	a annual conference I guess it is	19:26
	just about at the time of this crisis	19:30
	and maybe even some of those speeches	19:33
	in Brighton or wherever that conference is held	19:37
	have done something to contribute to the crisis.	19:40
	What has surprised me	19:45
	is as Britain was going into the crisis	19:47
	how little a serious discussion there was of the problem.	19:50
	I can illustrate this by the fact	19:54
	that I picked up on the newsstand,	19:56
	The New Statesman and Nation.	19:58
	This is the review of the intellectual branch	20:01
	of the Labour Party.	20:08
	I hesitate to say the left wing of the Labour Party,	20:10
	it may be that intellectuals as whole	20:14
	are a little bit further to the left	20:17
	than the trade union officials who constitute	20:19
	the backbone of the Labour Party are.	20:23
	But this is not like New Left Review	20:26
	there are more left journals than this.	20:28
	Well to an American aware that Britain was in crisis	20:31
	what struck me was how most of the articles, reviews	20:36
	of the second volume of letters of Virginia Woolf,	20:42
	the long run reforms of British society	20:48
	almost nothing that would give any	20:53
	joy to a gnome of Zurich that we are about	20:58
	to pick up our socks and do some orthodox things.	21:02
	Now I know that Denis Healey gave some speeches	21:06
	in Brighton I guess he was at that conference	21:10
	which sounded--	21:14
David	It was Blackpool actually.	21:15
Dr. Samuelson	Oh Blackpool, yes sorry, yes.	21:16
	Brighton, Blackpool	21:19
	(laughter)
	which sounded like Churchillian blood, sweat and tears	21:21
	that the vote will be hard but we shall persevere	21:27
	and we shall make the sacrifices et cetera.	21:32
	There apparently in the far left of the British party	21:35
	is no particular desire	21:39
	to go along with an increase in bank rate	21:44
	and with moderation in wage demands.	21:47
	Nothing surprising about that you would hardly expect	21:50
	the far left of the Labour Party	21:54
	to greet with joy such draconian measures.	21:56
	But what is it that they do want?	22:01
	Well apparently they propose as a counter alternative	22:04
	that the British be a siege economy	22:10
	that it introduce import controls by Britain.	22:14
	I was told by the signs in London to fly the flag	22:20
	which I may say I did British Airways did my little bit	22:24
	to help out the beleaguered mother island.	22:27
	And try to use some measure of emergency decree	22:33
	and planning to meet the crisis.	22:40
	It seems to me that that is an alternative	22:48
	which has some advantages in the short run	22:53
	and some disadvantages particularly in the longer run.	22:56
	But those who press too hard on European governments	23:00
	in which a large part of the electorate	23:07
	takes the view of socialism must be prepared to realize	23:11
	that these few face cards are left in the pack	23:17
	as far as those governments are concerned.	23:21
	And it's by no means certain that you can	23:24
	beat them down on to their knees to be using	23:27
	pre-1914 orthodoxy, you may drive them instead into	23:32
	Shaktian autarky which for better or worse	23:36
	will have some very serious long run consequences	23:42
	for the international order.	23:45
David	Are you concerned in other words	23:47
	that when the International Monetary Fund negotiates terms	23:49
	for this loan that they might be too hard on Britain?	23:52
	Is that--	23:55
Dr. Samuelson	Well my guess is that	23:56
	the Labour Party hierarchy is in tight enough control	24:03
	that it will promise almost anything	24:10
	in the way of good behavior.	24:13
	But before the time comes to repay that loan	24:16
	before that loan has run its whole course	24:20
	it may well be that the screws are put on too tight	24:23
	that it just will not be able to acquiesce	24:28
	or will in fact not acquiesce and will go into	24:31
	this siege economy which I've spoken of	24:35
	in which two people whose primary interest in	24:40
	life is the personal and business freedoms	24:46
	of a market economy would be the ultimate catastrophe.	24:48
	It also in terms of inefficiency	24:54
	might be if not the ultimate catastrophe	24:58
	a very considerable long run problem	25:00
	for the British economy.	25:04
	At the same time that I was in France,	25:08
	the French semi-Gaullist government of Giscard	25:11
	under his new economist Prime Minister had introduced	25:17
	the program of austerity	25:23
	so that the French franc would have some discipline on it.	25:27
	Unfortunately the first reception of the austerity program	25:35
	among the populace was not very favorable.	25:42
	I saw a Gallup poll or probably an opinion poll	25:45
	which showed that more than 50%	25:49
	of the populace had reacted adversely	25:52
	to the blood, sweat and tears that had been called for.	25:56
	So here you had a case of a price freeze,	26:01
	a severe wage stop for a limited period of time	26:08
	and since a coalition of the Socialist parties	26:14
	with a strengthened Communist party in France	26:25
	which sort of liked a little trouble	26:31
	in order that they can get in	26:34
	and put in some fundamental reforms,	26:36
	I would say that President Giscard is still	26:39
	far from being out of the woods.	26:42
	At the same time he's lost some support	26:44
	from the Gaullist section of his support.	26:48
	He's not exactly a run-of-the-mill Gaullist	26:52
	and in firing his previous Prime Minister	26:56
	who was more Gaullist he runs some danger	26:58
	of being squeezed between the millstones	27:02
	of the left and of the right.	27:05
	So I did not from my trip come back	27:10
	with the feeling that we in America	27:15
	are in a lot worse shape as Europe.	27:19
	One has often had that feeling	27:22
	in the post World War II period,	27:25
	particularly in the Eisenhower years,	27:27
	time and again at international conferences,	27:31
	the representatives from the U.S. and from the U.K.	27:34
	had to sit in a corner and be roundly denounced	27:37
	for our lack of initiative and growth	27:42
	and general incompetence.	27:44
	It really hurt to have the French preach to you	27:47
	the virtues of orthodox economic behavior.	27:49
	But right now if you had footloose money	27:56
	to invest in German Mark, Deutsche Mark at the U.S.	28:01
	market the stability of the U.S. society	28:08
	in an election year no matter who wins	28:15
	whether it's Carter or whether it's Ford would show appeal.	28:18
	In fact, reading out the headlines at the moment	28:25
	that a traveler sees as he goes to Europe,	28:29
	the one basic fact that struck me,	28:32
	was that in all countries	28:36
	there has been a tremendous erosion	28:39
	of profits and profitability.	28:41
	Much stronger in Europe than in the United States,	28:44
	in fact there are some signs that maybe in the U.S.	28:48
	profitability has been coming back a little	28:51
	in the last year or two.	28:53
	Real wages have in the U.S. taken a fall,	28:55
	they have stagnated now for eight years.	28:58
	Maybe that's coming for the worker in Europe	29:03
	but he hasn't yet learned to take it,	29:05
	he hasn't yet swallowed the bitter pill	29:08
	and therefore there does seem to be	29:11
	a large storm and stress still ahead for Europe.	29:15
David	Thank you very much.	29:19
	If you subscribers would like to ask questions	29:21
	of Professor Paul Samuelson	29:23
	or suggest subjects for him to discuss,	29:25
	please write to, Instructional Dynamics Incorporated,	29:28
	450, East Ohio Street, Chicago, Illinois 60611.	29:32

Item Info

Title:

Tape 206 - Western Europe; poor Britain-an endangered "snake"; a solid German mark; shaky French economy

Date:

October 1976

Contributor:

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

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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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samuelsonpaul
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pstau001184
ark:/87924/r4513vc1v
9736a896-75ed-40cc-a919-88c7bdc7cb03

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Tape 206 - Western Europe; poor Britain-an endangered "snake"; a solid German mark; shaky French economy

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