Tape 112 - Review of IMF actions

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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 by Instructional	0:07
	Dynamics Incorporated and was recorded October 6, 1972.	0:09
-	Since my last tape discussion, the meetings of the	0:14
	International Monetary Fund have come and gone.	0:17
	And in their wake, the international finance picture	0:22
	seems to be a little bit more peaceful than	0:26
	it has been at times this last summer.	0:31
	For one thing, we had the proposals by	0:34
	Secretary of Treasury Scholtz, the official US proposals,	0:37
	I'll discuss those.	0:42
	And, for another we had the reaction of the other	0:44
	member nations to those proposals.	0:48
	In a nutshell, the proposals	0:51
	were sensible, they were moderate,	0:57
	they were on the whole feasible,	1:01
	and that's a good thing.	1:04
	There were few surprises in them.	1:07
	But what I think is perhaps	1:09
	more interesting, they were quite well received.	1:13
	At least on the surface even the French	1:17
	seemed to go along with the general tenor of the	1:20
	American philosophy and proposals.	1:25
	This era of good feeling, temporary though it may be,	1:29
	has shown itself in the foreign exchange markets.	1:34
	And the dollar has risen	1:37
	as speculative pressures	1:41
	against it have been lifted.	1:42
	Now, what about the proposals themselves?	1:46
	I say that there were no surprises in them.	1:52
	In my last tape I discussed what I thought	1:56
	an optimist might hope for.	2:00
	And I had absolutely no leak from Washington	2:03
	but I duplicated, almost completely, every one of the	2:05
	official American proposals.	2:09
	Let me enumerate.	2:14
	First, there is to be a further widening	2:17
	of the bands within which	2:21
	the exchange rates are free to move.	2:25
	That means a greater area for floating.	2:29
	That means a greater area for corrections	2:33
	by the automatic forces of the market.	2:38
	Now it means to some people greater area for instability.	2:41
	The specific proposal by Secretary Scholtz	2:47
	for widening was a little bit complicated arithmetically	2:50
	and wasn't completely understood.	2:55
	Let me try to elucidate the matter.	2:58
	Under the post-December 1971 Smithsonian Agreement,	3:03
	a parity is named between every currency and the Dollar	3:09
	and the exchange rates are permitted to move	3:14
	in a band of 2 1/4% above and 2 1/4% below.	3:18
	That's a total band of flexibility for a currency	3:23
	against the United States of 4 1/2%.	3:27
	If the Pound is at the top of the band	3:30
	at one time and it goes through parity,	3:33
	that's 2 1/4% to the bottom of the band,	3:36
	that's another 2 1/4%, that's altogether 4 1/2%.	3:40
	That's the only degree of flexibility	3:45
	between the Dollar and any currency.	3:48
	Now, in a sense, because the Dollar is the	3:51
	numeraire, is the reference point, is the Greenwich	3:54
	from which standard time is measured so to speak,	3:58
	we get only half the flexibility	4:01
	with any other country in comparison with what	4:05
	a pair of non US countries get	4:09
	vis a vis each other.	4:14
	Let me explain.	4:17
	Suppose that France is at the bottom of her band	4:19
	with the Dollar and suppose that England is	4:23
	at the top of her band with the Dollar.	4:26
	And suppose France goes from the bottom to the top	4:29
	and England goes from the top to the bottom.	4:32
	Then, we have traversed twice	4:37
	4 1/2%	4:42
	in totality.	4:47
	And so there's twice the amount of flexibility	4:48
	of the Pound versus the Franc.	4:50
	Secretary Scholtz has said let's get rid of the notion	4:55
	of the Dollar as the key currency.	4:59
	I overstate a little but in this respect,	5:01
	let's let the United States	5:04
	have as much flexibility as the others.	5:05
	Now, what this must mean is that the US loses	5:07
	it's role as Greenwich, as standard reference,	5:11
	as what economists call technically the numeraire.	5:14
	And there must be some other numeraire	5:18
	that presumably is to be paper gold and official gold.	5:20
	I use paper gold and official gold interchangeably.	5:27
	And, the United States is to get	5:29
	twice the flexibility which it now has.	5:33
	Is this a movement in the right direction?	5:38
	For the vast majority of economic experts	5:41
	who are convinced that what is needed is	5:45
	more frequent, flexible changes in exchange rates	5:48
	rather than pegged rates which don't stay stable.	5:51
	This is definitely an improvement.	5:55
	It's only a small element however.	5:57
	And if the Dollar is grossly	6:00
	overvalued as it certainly was before	6:04
	the August 15, 1971 events,	6:08
	widening the band doesn't do very much for you	6:12
	because the currency immediately goes	6:15
	to the extreme and it just gives you a little	6:17
	piecemeal, depreciation, which by definition	6:19
	isn't enough to correct grossly overvalued Dollar.	6:23
	Likewise, if some people think the Dollar	6:28
	might now be undervalued,	6:31
	I don't know if there are any who think it is	6:35
	grossly undervalued.	6:37
	Widening the band would just give you a little,	6:38
	once and for all, first time relief	6:41
	but the moment the Dollar moves to strength,	6:43
	to the strong part of the band from it's viewpoint,	6:45
	then you've had it, it's pegged, there.	6:48
	But, it is a step in the right direction.	6:51
	Now if you widened the bands to infinity,	6:54
	then there would be no limits at all	6:58
	and you'd be on a floating exchange rate	7:00
	and those who want complete flexibility	7:02
	and want it now, that would be their preferred solution.	7:03
	This is a very small movement toward infinity however.	7:06
	Secondly, George Scholtz asked for more frequent	7:11
	changes in parity.	7:15
	And these more frequent changes in parity,	7:17
	this is in other words a form of a crawling peg	7:21
	or a gliding band.	7:23
	These more frequent changes of parity,	7:25
	perhaps limited in amount,	7:26
	are to be triggered off by	7:29
	some objective indications.	7:34
	And it might be a matter of	7:36
	not the volition of the country in question,	7:40
	but the IMF as the referee,	7:45
	as the regulator	7:50
	of the whole setup, they might be able to give the word.	7:51
	What is stressed by George Scholtz	7:58
	is that both the surplus countries and	8:01
	the deficit countries have an obligation	8:03
	to have their currencies move.	8:06
	So if for example, everybody was in equilibrium	8:10
	except Japan and the United States,	8:13
	and if the American Dollar was overvalued	8:14
	and the Japanese Yen was undervalued,	8:18
	we could imagine under this setup	8:20
	that the IMF would notify each of us	8:22
	what we must do in the United States,	8:26
	whether we want to or not,	8:30
	I exaggerate of course because this is all open	8:32
	to negogiations (mumbles) if you're a big country.	8:34
	What we must do is depreciate the dollar	8:37
	relative to paper gold and official gold	8:40
	relative to the numeraire in the system.	8:44
	And the Japanese	8:47
	must appreciate	8:52
	the Yen, revalue it upward, relative to	8:55
	paper gold and official gold.	8:58
	So things presumably will get two ways better	9:00
	if as most economists believe,	9:03
	exchange rates are equilibrating when made	9:06
	in the right direction.	9:10
	Secretary Scholtz was a little vague on what	9:14
	would be the objective indications.	9:17
	It presumably would be movements in reserve,	9:20
	international reserves, that are of a chronic type.	9:24
	Now, third,	9:30
	the Dollar	9:33
	is to be phased out not only as the numeraire,	9:36
	but is to be phased out as a special form	9:41
	in which people hold reserves.	9:44
	Indeed, Secretary Scholtz said that the United States	9:46
	did not rule out in principle	9:50
	that the Dollar overhang,	9:52
	the 40 and more	9:57
	billions of dollars that are now abroad,	9:58
	that went abroad because of the previous disequilibrium	10:00
	in the currency parity of the Dollar.	10:04
	And which had to be swallowed by Central Banks.	10:06
	First they were swallowed when interest rates were	10:09
	very high on dollar obligations by	10:11
	private investors in Europe and elsewhere	10:13
	but after our interest rates began to come down,	10:17
	they had to be swallowed by the swallower	10:19
	of last resort in each country	10:21
	which is the Central Bank, the Bank of England,	10:23
	the Bank of Italy, the Deutsches Bank and so forth.	10:27
	Now they didn't want to acquire those Dollars.	10:32
	They had no choice but to acquire them	10:34
	if they weren't going to appreciate their currencies	10:37
	which they were loathe to do for a variety of	10:39
	political and other reasons.	10:41
	Those Dollars are sitting very heavily	10:44
	on their stomachs and they would like very much	10:46
	to have them converted into something.	10:49
	Now it's quite obvious that 10 billion dollars	10:52
	worth of gold in Fort Knox is not going to be	10:54
	made available to everybody all at once	10:56
	and if it were made available all at once	10:59
	it wouldn't stretch over 40 billion	11:00
	and more dollars of obligations.	11:03
	So, it has to be in terms of something else	11:06
	and George Scholtz said that we might	11:09
	ultimately come to an agreement that	11:12
	they would get paper gold or special issue	11:15
	of SDR, special drawing rights, paper gold.	11:18
	Now what this means of course is,	11:22
	and it's a fairly serious commitment for the United States	11:24
	when that day arrives, that from that time on	11:26
	if the Dollar continues to be weak	11:30
	and depreciates further,	11:32
	the people who own these special SDRs are protected	11:35
	against those further Dollars and to us	11:39
	who may some day have to make good	11:43
	these liabilities which we have abroad,	11:45
	these liabilities will appreciate in terms of Dollars,	11:48
	require higher taxes in this country if the government	11:53
	says to pay them off	11:56
	when the Dollar depreciates.	12:00
	It's a greater real burden.	12:02
	It's an affective guarantee	12:05
	of the value of our liabilities abroad.	12:09
	It would be as if you borrowed money during a time	12:13
	of inflation and instead of agreeing to pay back	12:16
	$1000, you agree to pay back as much as a $1000 will buy	12:19
	so that if as in Germany in 1923, you had a trillion fold	12:26
	increase in prices, you would owe not a $1000 dollars,	12:29
	but you would owe a trillion thousand dollars.	12:32
	Well, I've put things in terms of price levels	12:36
	but we should think of these	12:39
	in terms of changing currency parities.	12:41
	After all the exchange rate is just	12:43
	from one view point, kind of price.	12:45
	As the Dollar is phased out,	12:54
	we don't just treat the overhang of Dollars,	12:58
	we also presumably	13:02
	reduce our future opportunities	13:06
	to act, so to speak, as counterfeiter for the world	13:10
	or as the money provider for the world.	13:14
	As a bank which issues money	13:17
	which the rest of the world accepts.	13:21
	So, in the past we've been able to run a healthy,	13:26
	normal deficit of some amount,	13:30
	maybe one billion, two billion dollars a year	13:33
	because that was the amount of genuine dollars	13:36
	which people genuinely wanted to accumulate	13:39
	because the dollar was used as a key currency,	13:41
	as a key holding for liquidity and for transaction purposes.	13:44
	If the Dollar is phased out from that purpose	13:48
	and the Pound in the 19th Century,	13:50
	last part of the 19th Century,	13:54
	had the role which the Dollar now has	13:55
	and the Pound was phased out from that function,	13:57
	then we will lose this	14:01
	real resource.	14:05
	I guess we've gotta grow up into the last part	14:07
	of the 20th Century and realize that the United States	14:10
	is no longer kingpin.	14:13
	Remember, this is worth just pausing for a moment,	14:16
	on the changing and dwindling role	14:21
	of the United States in the world.	14:23
	At the end of World War 2, when so much of the world	14:27
	was destroyed by war and when the United States	14:30
	was not destroyed in any degree	14:33
	and where on the contrary we came out	14:37
	because of the pump priming during World War 2	14:39
	we came out of a great depression	14:43
	and came into the post war period with a	14:46
	enlarged labor force.	14:50
	We at that time had 50% of the world GNP in real terms.	14:53
	6% of the population, 50% of the world GNP.	14:59
	That is a tribute to the productivity	15:03
	of the American system.	15:06
	It also provides	15:08
	one of the reasons why	15:11
	many people in the rest of the world	15:12
	resent the United States.	15:14
	Here we all are on a limited spaceship	15:16
	with exhaustible resources and 6% of the people	15:19
	are living high on the hog and are using up,	15:24
	in some cases irreversibly, resources while the rest	15:27
	of the people are doing without.	15:31
	Nonetheless, you can see why the United States	15:36
	dominated Bretton Woods, 50% of the total.	15:38
	And if you took the amount of income above	15:44
	the bare necessity of life, then the United States	15:47
	probably had 70% of that total.	15:49
	Well that 50% that (mumbles) 45, has been going	15:54
	down, down, down.	15:58
	I've just recently received an estimate	16:01
	of where the world stands in 1971	16:03
	from an official in the State Department,	16:06
	Economics Division of the State Department,	16:08
	and we're down to 27% of world GNP.	16:11
	Because over 10 years, 15 years, 20 years,	16:16
	25 years, United States growth has done so badly.	16:20
	On the contrary, by and large in the post World War 2	16:24
	era after (mumbles), the United States has done better	16:29
	in real terms and in per capita terms	16:33
	and in productivity terms and in maintaining	16:36
	the proximation of full employment than	16:40
	in almost any epoch in our history.	16:43
	The 1950s of course with the slow growth from	16:45
	1953 through 1960	16:48
	provides a partial exception to that.	16:52
	But it's because of the miracles in Japan,	16:55
	in Western Germany, in Western Europe generally,	16:57
	that the rest of the world has come up.	17:02
	And even now it is no surprise	17:06
	these days if a Brazil can run 10% real income growth	17:09
	as they have for three or four years.	17:15
	Even countries like Austria and Greece and Taiwan	17:17
	and Thailand and South Korea run	17:21
	vastly higher rates of real growth than the United States.	17:26
	That's to be expected because we're the leader	17:30
	and all they have to do is to imitate to close the gap	17:34
	between where they are and where we are.	17:38
	We have nobody in that same sense to imitate	17:40
	even though we can get some technological ideas from abroad.	17:43
	Well, this fact that the United States is	17:49
	smaller in importance is precisely	17:53
	the same sort of thing that has happened to Britain.	17:57
	One of the reasons the Dollar is the key currency	18:00
	was just because of our very size.	18:03
	That's point number one.	18:06
	Point number two, the Dollar is key currency	18:07
	as we moved into the first Bretton Woods era	18:10
	after 1944, 1945, because the Dollar was an undervalue	18:12
	currency and had been for some period of time.	18:16
	I won't review all the reasons why that disappeared	18:21
	but as soon as everybody had a rational expectation	18:24
	that the next time the parity of the Dollar changed,	18:27
	it would change in a direction adverse to the Dollar,	18:30
	this obviously would lessen the appeal of the Dollar	18:33
	as a portfolio holding.	18:37
	And even as a medium of exchange because while	18:42
	you're holding it you're losing value.	18:45
	Thirdly, one of the reasons that the Dollar	18:49
	was so important was that	18:52
	we had a politically stable system.	18:53
	When Hitler's in Germany and when the Russian's	18:56
	rattled the saber, this was very hard on the nerves	19:00
	of people with money and so New York was a good place	19:04
	to hold your money and the Dollar	19:06
	was a good safe medium in which to store your wealth.	19:08
	It's no secret all over the world	19:13
	that there is kind of a malaise in American society.	19:15
	There are class divisions that didn't seem to be	19:20
	apparent on surface at least before	19:23
	and some people are wondering whether there aren't	19:26
	other societies which are more stable.	19:30
	Perhaps Switzerland, even though you are penalized	19:34
	in terms of interest received, is a better place	19:36
	to hold your money, perhaps Western Europe,	19:39
	perhaps even Japan.	19:41
	That too lessened the importance	19:44
	of the Dollar.	19:48
	Well, Secretary Scholtz apparently has grasped	19:52
	the nettle and is willing to admit in principle	19:55
	that we are ready to relinquish our previous role.	19:59
	Remember, with that previous role as a key currency	20:02
	there came also responsibilities.	20:06
	And in some ways it was liberating to	20:08
	Britain, to the city of London,	20:12
	that it didn't have to play that particular leader function.	20:14
	So it may well be for us.	20:19
	One last point in George Scholtz's message,	20:22
	he said that we	20:26
	regretfully had to suggest	20:31
	that there was a room for temporary import tax surcharges.	20:33
	If the rest of the world wouldn't play ball	20:38
	with a particular country and it was in disequilibrium	20:41
	and it wasn't permitted by the rest to correct	20:44
	it's equilibrium then it really had a legitimate right	20:47
	and no other choice but to put in	20:51
	temporary import tax surcharges, like, one guesses	20:55
	that which President Nixon put in in	21:01
	August 15, 1971.	21:05
	Finally, Secretary Scholtz	21:08
	looked forward to a day	21:13
	when the role of metallic gold, of official gold,	21:16
	would become less and less.	21:20
	He didn't come right out and say	21:21
	that we would at some future day get rid of gold	21:24
	completely but the whole tenor of his remarks	21:26
	was opposed to the hopes of South Africa,	21:29
	the Soviet Union, the French gold block,	21:33
	that the role metallic gold	21:37
	would be strengthened.	21:40
	Of course there have been ups and downs	21:42
	in the free gold price	21:44
	as a result of these announcements	21:46
	and in the prices of South African gold shares.	21:51
	Before leaving the International Monetary Fund meetings,	21:53
	let me comment briefly on the American opposition	21:58
	to Schweitzer, the Director General of the	22:05
	International Monetary Fund.	22:07
	As far as the gossip in the hotel corridors	22:09
	is concerned, it appears that Secretary Connelly	22:14
	was peaked at Schweitzer.	22:20
	It isn't clear that the IMF did anything	22:24
	which the United States should have been annoyed with.	22:28
	It said that Secretary Scholtz simply inherited	22:35
	this ancient grudge, I don't know how Under Secretary	22:38
	Paul Volker feels about it.	22:42
	There was a petty element in this	22:45
	but on the other hand when a man has been	22:48
	in an international agency for a considerable	22:50
	period of time, it's time for him to move on.	22:53
	This American opposition was not well received.	22:58
	Perhaps simply because America was against him,	23:03
	the rest of the countries were for him.	23:05
	For example, after the President gave his speech	23:07
	and that was politely received,	23:12
	then there was a standing ovation for Schweitzer.	23:14
	A very pointed one, probably,	23:20
	no more intended than the stand up for the underdog and also	23:24
	to twist the tail of the over dog.	23:28
	This sentiment erupted in a more practical way	23:33
	when it came to elect a chairman of the group of 20.	23:38
	We had insisted that the group of 10	23:42
	be enlarged to a group of 20	23:43
	for the next stage of negotiations.	23:46
	There was a stalemate.	23:51
	The vote was 10 and 10.	23:53
	They took another vote and it was 10 and 10.	23:55
	They waited the next day and the vote was 10 and 10	23:57
	between our candidate	24:00
	and Morris, the non-American candidate.	24:03
	This went on but finally was broken dramatically	24:08
	by a 12 to eight vote and America was out voted.	24:11
	I think there's just something symbolic that below	24:15
	the year of good feeling there still are some resentments.	24:18
	In short, the way will not be easy	24:23
	but one can be hopeful that some progress will be made.	24:28
	What would be most helpful, of course,	24:35
	would be for the medicine	24:38
	which was prescribed and taken by the patient	24:44
	at Smithsonian to begin to show some signs of working.	24:48
	And there have been precious few such signs.	24:54
	Nevertheless, our costs, our productivity,	24:56
	our prices have been behaving better than those	25:01
	of most of the rest of the world.	25:05
	The rest of the world is coming out of a recession	25:08
	that can be expected to intensify cost pressures there.	25:11
	So I don't think we should give up hope yet	25:16
	that that medicine will begin to work.	25:19
	On the other hand, I do not see any evidence	25:22
	as yet, we'll know more later, that the Dollar	25:25
	has swung over from being an overvalued currency	25:30
	to being an undervalued currency.	25:34
	One swallow doesn't make a spring	25:36
	and you can't speak of chronic undervaluation	25:40
	until we begin to correct the deficit,	25:42
	the basic deficit, and indeed until we begin	25:46
	to err on the opposite side and begin to	25:49
	run surpluses.	25:52
	That day has not yet	25:54
	come near.	25:57
-	If you have any comments or questions	25:58
	for Professor Samuelson, address them to	26:00
	Instructional Dynamics Incorporated,	26:02
	166 East Superior Street,	26:04
	Chicago, Illinois, 60611.	26:06

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Title:

Tape 112 - Review of IMF actions

Date:

1972

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

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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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Tape 112 - Review of IMF actions

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