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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 | 0:09 | |
and was recorded December 27th, 1971. | 0:11 | |
- | This is the time for me | 0:16 |
to wish all of you listeners a Happy New Year. | 0:17 | |
The nicest thing perhaps that I can feasibly say | 0:22 | |
for the coming year is that let's hope | 0:25 | |
that the fashionable forecast | 0:28 | |
which is a fairly optimistic one, | 0:31 | |
not optimistic enough for academic perfectionists, | 0:33 | |
but which will pleasantly surprise many people | 0:36 | |
in the financial community. | 0:40 | |
Well, let's wish that that forecast is realized | 0:41 | |
for the American economy | 0:44 | |
and let's not waste very many tears | 0:47 | |
over the year that has gone by. | 0:49 | |
1971 was not a very good year for the American economy. | 0:52 | |
It's one of those years that was pretty good | 0:58 | |
for economists because by and large things did turn out | 1:00 | |
as an economist might have expected them to | 1:05 | |
in this particular year. | 1:08 | |
Today there's only one thing | 1:12 | |
that I could possibly talk about | 1:15 | |
and that is about the international monetary agreements | 1:18 | |
that were reached in Washington | 1:21 | |
in the week before Christmas. | 1:23 | |
First let me say that President Nixon | 1:27 | |
can be pardoned for his exaggeration | 1:30 | |
in saying that they are the most important | 1:34 | |
international agreements in the history of the world. | 1:36 | |
They needn't be that | 1:42 | |
but nevertheless I think that they are important | 1:43 | |
and I think that they turned out much better | 1:47 | |
than most economists would have expected. | 1:49 | |
A remark like that is always ambiguous. | 1:54 | |
It depends upon what you expected. | 1:57 | |
So let me enlarge upon what was important | 2:00 | |
that happened in Washington, | 2:05 | |
what was unimportant that happened in Washington, | 2:06 | |
and some important things that are still to be decided on | 2:10 | |
at future monetary negotiations. | 2:15 | |
The headlines, of course, carry the story | 2:21 | |
that a token increase in the dollar price | 2:23 | |
of official IMF gold was agreed to. | 2:27 | |
Every prudent man knew it would have to be | 2:35 | |
somewhere between 5 and 10%, | 2:36 | |
in the event it turned out to be nearer the 10%. | 2:39 | |
The token increase in the price of gold | 2:46 | |
is not very important. | 2:49 | |
Its primary importance | 2:51 | |
is that it was insisted upon by France | 2:52 | |
and that most of France's allies in the club of 10 | 2:55 | |
rallied around with her on this issue. | 3:00 | |
So it was absolutely necessary from a tactical viewpoint | 3:02 | |
that the United States give up its intransigent position | 3:06 | |
that it would never agree to a change in the price of gold | 3:12 | |
in order to get out of negotiations. | 3:15 | |
That was done at Rome two conferences back | 3:19 | |
and in the Azores we had the headline announcements | 3:25 | |
that President Pompidou and President Nixon | 3:29 | |
had agreed in principle to a token upward revision | 3:32 | |
in the price of official gold. | 3:38 | |
Finally in Washington a number was put on it | 3:42 | |
and that issue is for the moment over. | 3:46 | |
You notice that I have been using the word token throughout. | 3:52 | |
This is to emphasize that none of the things | 3:56 | |
that are important, for example, | 4:00 | |
whether the United States will pick up extra exports | 4:02 | |
and whether our imports will be cut down | 4:06 | |
and whether the cutting down of our imports | 4:08 | |
will hurt workers in the Japanese | 4:10 | |
and German export industries. | 4:13 | |
None of these are touched at all | 4:15 | |
by whether the official price of gold | 4:17 | |
is or is not changed. | 4:20 | |
Gold does, however, have a popular interest | 4:25 | |
and a certain amount of sex appeal | 4:30 | |
that is beyond its true merit. | 4:33 | |
So let me comment on what this means | 4:34 | |
for the free gold market, | 4:38 | |
for the unofficial tier, the free tier, | 4:42 | |
the gold market in Zurich and in London | 4:47 | |
which has been cut off completely, | 4:50 | |
almost completely, from the official tier. | 4:56 | |
By and large, it represents a disappointment to that market. | 5:01 | |
You may say that if the official prices raised by 8 or 9%, | 5:06 | |
won't that do something for the free price? | 5:13 | |
The answer is, of course, not necessarily. | 5:17 | |
But if people in the free market have been holding gold | 5:20 | |
in the hope, in the prayer, in the expectation | 5:25 | |
that the official price of gold would be doubled | 5:29 | |
then nothing could be more disappointing, | 5:33 | |
more derisory, than only an 8 or 9% increase. | 5:37 | |
Particularly since any prudent man must know | 5:40 | |
that having come to this negotiated decision, | 5:44 | |
the powers of the world that be | 5:50 | |
will not soon change their minds upon this matter. | 5:52 | |
In fact, it would take another international monetary | 5:56 | |
crisis and breakdown to cause | 6:00 | |
even a reopening of this question. | 6:02 | |
Well, of course, this has been discounted well in advance | 6:06 | |
and the price of gold shares has moved very little. | 6:11 | |
I looked up American South African Trust, | 6:16 | |
which I think would be a typical bellwether | 6:20 | |
of what's happening to the prices | 6:22 | |
of South African gold shares, | 6:25 | |
which in turn are a bellwether of what's happening | 6:28 | |
to the hopes and fears of private speculators in gold. | 6:31 | |
And I note that American South African Trust | 6:36 | |
is very near its low for the year. | 6:45 | |
Anyone who bought it earlier in the year | 6:48 | |
is likely to have a very considerable loss in the matter. | 6:50 | |
Well, people who have been speculating in gold | 6:54 | |
and I'm now speaking of noncriminals, | 6:57 | |
that is, non-Americans, say the French | 7:00 | |
have had their warning all along. | 7:04 | |
This has not been a well-informed market | 7:07 | |
and it's pleasant that we can begin now | 7:11 | |
to forget about the official gold market. | 7:16 | |
Mind you, since South Africa will presumably be given | 7:20 | |
the right to sell in both markets | 7:25 | |
provided that the free market price | 7:28 | |
falls to the floor set by the official price, | 7:30 | |
and I don't know whether in the new agreement | 7:33 | |
that official floor will be $35 as I hope per ounce | 7:35 | |
and not the new number of $38 an ounce. | 7:41 | |
There is some small connection between the two markets | 7:45 | |
but that connection is very unimportant. | 7:50 | |
I think that South African recognition | 7:54 | |
of this disappointment has just devalued | 7:56 | |
in terms of gold her rand, her currency, | 8:01 | |
and by more perhaps than many people had expected. | 8:05 | |
Let's turn to what was important. | 8:11 | |
What was important and most important | 8:13 | |
at the Washington conference was a final agreement | 8:17 | |
upon currency parities vis a vis not gold | 8:20 | |
but vis a vis the dollar. | 8:26 | |
What was needed were substantial appreciations | 8:28 | |
of other currencies relative to the dollar. | 8:32 | |
What we got was even more | 8:35 | |
than one might have dared hope for. | 8:37 | |
If one had hoped for 12 to 15% appreciation at the end, | 8:40 | |
in the event we got 17%. | 8:45 | |
If one had hoped for 10 to 12% appreciation | 8:48 | |
in the value of the mark relative to the dollar | 8:52 | |
in comparison with before May of 1971, | 8:55 | |
in the event we got a more than 13% increase. | 9:00 | |
The average of all currency appreciations | 9:06 | |
was very substantial including a fairly nice | 9:10 | |
and hefty appreciation of the franc. | 9:14 | |
Of course, the French saved face | 9:16 | |
because by raising the official price of gold | 9:19 | |
the French could just stand pat on gold | 9:22 | |
and that would give what is important, | 9:26 | |
some appreciation of the franc relative to the dollar. | 9:28 | |
The Swedes, this would be a typical pattern, | 9:35 | |
devalued 1% with respect to gold | 9:40 | |
and that meant that the Swedish krona | 9:42 | |
is appreciated some 7-odd% relative to the dollar. | 9:46 | |
Even the pound, which has been fairly strong | 9:53 | |
in international currency markets | 9:56 | |
after the medicine of devaluation of the pound in 1968, | 9:57 | |
slowly began to work. | 10:02 | |
Even the pound is appreciated | 10:04 | |
relative to the American dollar. | 10:07 | |
The Canadian dollar is still to float | 10:09 | |
and there may be some minor currencies | 10:13 | |
still to be heard from | 10:15 | |
but by and large I think that Secretary Connally | 10:16 | |
under Secretary Volcker and President Nixon himself | 10:22 | |
can congratulate themselves that they did succeed | 10:26 | |
in getting very good terms in this matter. | 10:31 | |
Now, I make it sound like an adversary procedure | 10:34 | |
in which we are trying to gain something | 10:37 | |
and the other is trying to lose something. | 10:40 | |
And that's the way perhaps it looks | 10:41 | |
to the grandstand spectator. | 10:43 | |
Actually though, I have wanted, I recommended, | 10:48 | |
I've been hoping for a sizable appreciation | 10:52 | |
of surplus currencies like the yen and the mark | 10:55 | |
in the interest of both countries, | 10:59 | |
in the interest of restoring equilibrium | 11:00 | |
in the balance of payments | 11:04 | |
and this upon the assumption | 11:06 | |
that if we do not restore equilibrium, | 11:08 | |
if we do not come close to equilibrium, | 11:12 | |
we will again be back in two or three years | 11:14 | |
in the same international crises | 11:18 | |
which have plagued the world recently | 11:21 | |
and which have threatened the world | 11:25 | |
for the last dozen years. | 11:27 | |
Now, before I pat ourselves on the back | 11:32 | |
at what a wonderful thing | 11:35 | |
we were able to get in Washington, | 11:37 | |
let me say that there is one group of economists | 11:40 | |
who are disappointed by the agreement | 11:43 | |
that I have been hailing. | 11:47 | |
These are the economists who hoped, who prayed, | 11:49 | |
maybe who even expected | 11:54 | |
that there would be no stabilization agreement at all, | 11:57 | |
that we would continue to have floating currency blocks. | 12:01 | |
The dollar would continue to float | 12:06 | |
hopefully in a clean float | 12:07 | |
relative to the common market countries | 12:11 | |
which united or individually would be engaged | 12:14 | |
in a clean float vis a vis the United States. | 12:19 | |
I never thought that such a hope was realistic. | 12:24 | |
This is not because the goal expressed in that hope | 12:27 | |
is one that I disagree with. | 12:32 | |
On the contrary, I can see much merit | 12:35 | |
in a a system in which currencies, and all currencies, | 12:38 | |
major currencies are engaged in floating | 12:45 | |
and in relatively clean floating. | 12:48 | |
But I knew that the world was not ready for that | 12:53 | |
and I knew that in the short run | 12:57 | |
the only tactical choice was between de facto stabilization | 13:00 | |
at close to equilibrium rates | 13:04 | |
or defacto stabilization at inadequate | 13:07 | |
and far from equilibrium rates. | 13:12 | |
So from the standpoint of that longer run goal | 13:15 | |
of a greater amount of dependence | 13:19 | |
upon floating exchange rates, | 13:22 | |
I think that that's to come if it's to come | 13:25 | |
in the far future | 13:28 | |
and I do not believe that the Washington agreements | 13:29 | |
make that far future farther removed in time. | 13:32 | |
On the contrary, I think that there's a better chance | 13:36 | |
that we will move toward that direction | 13:39 | |
because a reasonably attractive solution | 13:44 | |
was arrived at in Washington. | 13:48 | |
Now let me move on to the second most important thing | 13:52 | |
that was agreed upon in Washington | 13:56 | |
and that is the suspension | 13:58 | |
of the 10% August 15th import surcharge. | 14:02 | |
I believe it was in one of my earlier recordings | 14:10 | |
that I registered the pessimistic view | 14:13 | |
that protectionism is running so strong in American life | 14:18 | |
that we shall be saddled with that 10% import surcharge | 14:22 | |
for a long time to come. | 14:26 | |
And in fact, I made a small non-pecuniary bet | 14:28 | |
with a colleague that when November 1972 election day came | 14:32 | |
we would still have on most countries | 14:37 | |
a 10% import surcharge. | 14:39 | |
That is a bet I am delighted to pay off on. | 14:41 | |
I think it is very good news that a couple of days | 14:46 | |
after the completion of the Washington conference | 14:49 | |
President Nixon during his Bermuda summit meeting | 14:51 | |
with Prime Minister Heath of the United Kingdom | 14:55 | |
promptly removed the 10% import surcharge. | 14:58 | |
He also did something very important, | 15:04 | |
very important because it was so annoying | 15:07 | |
to our trading partners abroad. | 15:10 | |
President Nixon took that occasion | 15:14 | |
to remove the bi-american feature | 15:16 | |
of the Investment Tax Credit. | 15:19 | |
You will recall that when Congress | 15:20 | |
passed the Investment Tax Credit, | 15:24 | |
it put in the provision that you could get that | 15:26 | |
on American produced machinery | 15:28 | |
but you couldn't get it necessarily at least | 15:32 | |
on imports from abroad. | 15:35 | |
Well, now it's clear | 15:37 | |
that we shall be evenhanded in this matter. | 15:37 | |
What's so very important about the removal | 15:40 | |
of the 10% import surcharge is that the depreciation | 15:44 | |
of the dollar achieved in Washington | 15:49 | |
accomplishes all and more than the 10% import surcharge | 15:51 | |
by itself could accomplish | 15:58 | |
and accomplishes it in a more equitable | 15:59 | |
and in a more efficient manner. | 16:02 | |
Moreover, I've always taken seriously | 16:05 | |
the threat of an international trade war | 16:07 | |
involving increasing restrictions | 16:12 | |
upon the movement of goods and of capital funds | 16:15 | |
with the result that the extremely valuable growth | 16:19 | |
in the international division of labor, | 16:24 | |
a growth upon which the rising standard of living | 16:27 | |
of so many of the modern countries depends, | 16:32 | |
that was threatened in my judgment after August 15th | 16:35 | |
and even before August 15th by the prospect | 16:40 | |
of a retaliatory trade war all over the world. | 16:44 | |
Now, we're not out of the woods | 16:48 | |
as far as that threat is concerned. | 16:49 | |
There remains much to be done | 16:51 | |
including the removal of some | 16:53 | |
of our so-called voluntary quotas | 16:58 | |
and I would hope a reduction | 17:01 | |
of some of our mandatory quotas, | 17:04 | |
still further progress on the reduction of tariffs. | 17:06 | |
But aside from what's required for us to do, | 17:11 | |
there are plenty of restrictions abroad | 17:19 | |
which still should be removed. | 17:20 | |
And I think the Japanese, | 17:21 | |
although one can understand that they may feel | 17:23 | |
they've just given a very large appreciation, | 17:28 | |
I think that they should get about the business | 17:32 | |
of dismantling many of their import restrictions. | 17:33 | |
If they had no import restrictions, | 17:38 | |
I do not think that they will find themselves | 17:40 | |
inundated by American goods. | 17:42 | |
In fact, there was the news story which broke down | 17:44 | |
what the cost of a Pinto, | 17:49 | |
an American small car, would be in Japan. | 17:51 | |
As we all know, the cost of a Toyota, | 17:55 | |
although it's a little bit more | 17:57 | |
than it was before the appreciation, | 17:58 | |
is very much comparable in the United States | 18:00 | |
to what it is in Japan, let's say $2000 in each case. | 18:04 | |
A Pinto in the United States also costs $2000 | 18:08 | |
but it costs $5000 in Japan. | 18:10 | |
It turns out when you look at the actual figures though | 18:13 | |
that it is primarily not tariffs or quotas | 18:16 | |
or any governmental restrictions. | 18:20 | |
Those are fairly modest. | 18:23 | |
My recollection is that the markup | 18:27 | |
by the Japanese agency selling Pintos | 18:29 | |
is extraordinarily high by our standards. | 18:33 | |
If the Japanese got rid of that import tariff completely, | 18:36 | |
they would be able to come | 18:40 | |
in to the court of public opinion with clean hands | 18:41 | |
and say that it's just a question of commercial practice. | 18:44 | |
If Pintos can't be sold in Japan, | 18:48 | |
that's because it isn't to the profit | 18:50 | |
of anybody to sell them | 18:53 | |
and no consumers really wanna buy them | 18:54 | |
in comparison with other products. | 18:56 | |
Now let me comment on a third important thing | 18:59 | |
which was decided in Washington, | 19:02 | |
namely the agreement to widen the band | 19:04 | |
around the new parities | 19:08 | |
within which currencies can freely float. | 19:10 | |
Most newspaper writers did not notice | 19:15 | |
in the announcement from the Azores, | 19:17 | |
when President Nixon gave in so to speak | 19:19 | |
on the question of the increase in the token price of gold | 19:22 | |
President Pompidou also gave something | 19:26 | |
because he agreed in principle to a widening of the band. | 19:29 | |
Currencies can now fluctuate 2.25% | 19:34 | |
on each side in contrast to the only 1% | 19:37 | |
on each side range before the new agreements. | 19:40 | |
This is important because it's an approach | 19:44 | |
to the system of flexibility and floating. | 19:46 | |
It's important because we don't know whether | 19:51 | |
we guessed at the right parity levels | 19:53 | |
and this gives some leeway for adjustment. | 19:57 | |
And, as a matter of fact, in the trading days | 20:00 | |
since the completion of the Washington agreements | 20:04 | |
you have not seen the dollar bid down | 20:07 | |
to as low a level as was agreed upon there. | 20:13 | |
A fourth thing which would have been important | 20:19 | |
was not agreed upon in Washington | 20:21 | |
and one notes with a small amount of sadness this fact, | 20:24 | |
but I suppose it was not realistic | 20:27 | |
to expect it to happen so soon, | 20:29 | |
and that is no agreement was reached | 20:31 | |
upon any kind of crawling or sliding peg | 20:34 | |
so that the whole band with its midpoint of parity | 20:38 | |
can itself slowly drift upward or downward | 20:44 | |
depending upon whether a currency is in surplus or deficit. | 20:48 | |
The crawling peg I hope is to come | 20:53 | |
because it's important to get at least gradual flexibility | 20:55 | |
if you cannot have instantaneous floating | 20:59 | |
and I hope that by bilateral agreements | 21:03 | |
we will arrive at some progress in that direction. | 21:06 | |
Finally, a very important matter | 21:12 | |
was left for further negotiations | 21:15 | |
and that is what sort of convertibility, if any, | 21:18 | |
is there to be for the dollars which are held abroad. | 21:22 | |
You know that American economists of almost all opinions | 21:29 | |
have been urging upon the Nixon administration, | 21:34 | |
they go very slowly in guaranteeing convertibility | 21:37 | |
of the dollars that went abroad earlier. | 21:41 | |
And I may add that aside from a short run reflux of dollars | 21:45 | |
because lots of speculators who've had their money | 21:50 | |
in marks in Germany | 21:54 | |
and who have not taken their profits | 21:56 | |
or had not taken their profits until the final agreement | 21:59 | |
and, by the way, who were astute not to have done so, | 22:01 | |
they will now be wanting to cash in their marks | 22:05 | |
and take their profits | 22:08 | |
and presumably some of that money | 22:09 | |
at least will come back into the dollar. | 22:11 | |
In fact, the dollar is a good holding right now | 22:12 | |
and for the next year or two | 22:15 | |
because it's just had its price marked down | 22:17 | |
and it's very unlikely that the official parity | 22:21 | |
of the dollar is going to have to be changed | 22:25 | |
in a downward direction for some time to come. | 22:29 | |
But if there's anything that we know | 22:34 | |
from economic principles, | 22:37 | |
it is that the medicine | 22:38 | |
of exchange rate depreciation works slowly. | 22:40 | |
We cannot expect our balance of payments, | 22:44 | |
let's say our current balance of exports over imports | 22:47 | |
which ought to be in the general area | 22:50 | |
of plus six billion, eight billion surplus, | 22:54 | |
10 billion, you name it, but which has, | 22:58 | |
in fact, been around zero, | 23:01 | |
we cannot expect it to spring up to six billion | 23:02 | |
in a short period of time in one year | 23:05 | |
or even in two years' time. | 23:08 | |
Therefore, there's a great likelihood | 23:10 | |
that dollars will continue to go abroad | 23:12 | |
and they may do so in amounts | 23:16 | |
greater than private individuals will want to hold them. | 23:18 | |
As a result, central banks will be forced | 23:22 | |
under the rules of the game to acquire those dollars. | 23:25 | |
Course, they won't hold green bills which pay no interest. | 23:28 | |
They will no doubt wish to buy treasury bills | 23:31 | |
or special securities which are governmental issue | 23:37 | |
for central banks to hold. | 23:39 | |
Now my point is that American economists do not want | 23:41 | |
the United States government to agree | 23:46 | |
to a juicy rate of interest on such holdings. | 23:48 | |
We do not believe that the United States | 23:51 | |
is in the position that Germany was in | 23:53 | |
after World War I reparation payments were due, | 23:54 | |
when you had to have a Dawes Plan and a Young Plan. | 23:58 | |
We do not think that the American obligation situation | 24:02 | |
is like that of the sterling balances after World War II | 24:07 | |
where there had to be some systematic | 24:10 | |
arrangements made for funding. | 24:11 | |
And we will not welcome Dr. Jacques Rueff | 24:13 | |
if he comes to our shores with the proposals | 24:18 | |
suggesting that if we keep our noses clean | 24:23 | |
the French and the other nations of the world | 24:26 | |
will agree to a reasonable settlement | 24:28 | |
for these dollars that are outstanding. | 24:31 | |
I speak of Dr. Jacques Rueff | 24:34 | |
because he has been one of the most forthright | 24:36 | |
in saying this but I'm very much fearful that we have | 24:38 | |
in our own shores very esteemed experts, | 24:43 | |
whether they be Dr. Robert Triffin of Yale | 24:47 | |
or Dr. Edward Bernstein, | 24:51 | |
well-known consultant in Washington, | 24:55 | |
they would be able to dream up | 24:58 | |
various schemes for convertibility | 24:59 | |
but I think that the American government | 25:01 | |
should not be buying them. | 25:03 | |
This means that something very important | 25:05 | |
has been left in abeyance by the Washington agreements | 25:09 | |
because you have to think very hard | 25:12 | |
as to what it means to have a de facto stabilization | 25:14 | |
of currencies which are not allowed to float | 25:17 | |
but still with very limited convertibility. | 25:20 | |
And I'm sure there'll have to be an agreement | 25:25 | |
among the European common market countries | 25:28 | |
that will not permit any one of the six | 25:32 | |
to get rid of its dollars in a way | 25:34 | |
that would require the other five | 25:38 | |
simply to have to pick them up. | 25:40 | |
There will be therefore plenty of problems left | 25:43 | |
in the international monetary area | 25:45 | |
but I'm glad to report | 25:48 | |
that in comparison with last July or with last February | 25:49 | |
or really with any date that you can name back to 1959 | 25:54 | |
the outlook looks a little bit better | 26:00 | |
on the international front today. | 26:03 | |
- | If you have any comments | 26:07 |
or questions for Professor Samuelson, | 26:08 | |
address them to Instructional Dynamics Incorporated, | 26:10 | |
166 East Superior Street, Chicago, Illinois 60611. | 26:13 |
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