Tape 84 - Foreign reaction to American dollar evaluation
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- | Welcome once again as MIT Economics Professor, | 0:02 |
Paul Samuelson, discusses the current economic scene. | 0:04 | |
This biweekly series was produced | 0:07 | |
for Instructional Dynamics Incorporated | 0:09 | |
and was recorded September 7, 1971. | 0:11 | |
I'm just back from a quick trip to Europe. | 0:15 | |
It was interesting to be in London, | 0:18 | |
talk to people in the city in the aftermath | 0:23 | |
of President Nixon's decisive action | 0:26 | |
with respect to the dollar | 0:28 | |
and with respect to his domestic programs. | 0:31 | |
Of course what interested people abroad most | 0:34 | |
was the behavior of the foreign exchange rates | 0:38 | |
rather than what interested the man | 0:42 | |
in the street in America most, namely the wage price freeze. | 0:45 | |
Let me then give you some of the reactions | 0:51 | |
that I encountered in talking to merchant bankers, | 0:55 | |
to financial people, to economists, | 0:59 | |
and in a limited degree, to the man in the English streets | 1:02 | |
in Birmingham and in London. | 1:09 | |
On the whole, President Nixon's program has been received, | 1:15 | |
according to my samplings, very well abroad. | 1:18 | |
I spoke to one merchant banker who confessed | 1:23 | |
that he didn't understand why they were, | 1:27 | |
they, the English financial community | 1:29 | |
and the continental financial community, | 1:34 | |
were not being more beastly about | 1:36 | |
the President Nixon's program and he said | 1:38 | |
the explanation that came to him | 1:40 | |
was that everybody abroad had realized | 1:42 | |
that the previous House of International Finance | 1:46 | |
was a house of cards | 1:50 | |
and that it was in a transitional state which could not last | 1:52 | |
and so it was with a feeling of relief in a sense | 1:57 | |
that the president's cutting off convertibility | 2:03 | |
with gold had taken place. | 2:08 | |
That then is the single most common reaction abroad. | 2:11 | |
That, I think, cannot last. | 2:20 | |
The knives are beginning to be sharpened | 2:22 | |
and we are increasingly receiving criticism | 2:25 | |
and will receive more criticism, I will predict, | 2:29 | |
from people abroad because of what seems to them | 2:32 | |
to be the unilateral character of the American policy. | 2:36 | |
I should like to say that although I never hesitate | 2:44 | |
to criticize the administration, | 2:49 | |
and I never hesitate to criticize President Nixon | 2:54 | |
when I think that his utterances are incorrect | 2:56 | |
or ill advised or that his policies are not working. | 3:00 | |
Still, I do not believe | 3:04 | |
that I should feel critical of him in this regard. | 3:09 | |
We know that there has been behind the scenes negotiation | 3:16 | |
between our treasury officials | 3:22 | |
and our fellow reserve officials for years now, | 3:23 | |
suggesting to foreign governments, | 3:28 | |
putting pressure upon foreign governments | 3:34 | |
to our introducing some kind of flexibility | 3:36 | |
in the foreign exchange set up. | 3:38 | |
This is not something that Governor Dewey Daane | 3:42 | |
of the Federal Reserve can go onto television to talk about. | 3:45 | |
This is not something which, under secretary Paul Volcker, | 3:51 | |
and both of these men I wish to point out | 3:57 | |
represent continuity with the previous administration, | 3:59 | |
they occupied essentially the same positions | 4:02 | |
that they now hold in both the Johnson Administration, | 4:05 | |
closing years of the Johnson Administration | 4:11 | |
and in the Nixon Administration. | 4:13 | |
They could not emphasize this, | 4:14 | |
but you could read between the lines and in the lines, | 4:16 | |
going way back to the Copenhagen Meetings | 4:22 | |
of the International Monetary Fund and Bank | 4:25 | |
and even earlier that the United States was pressing | 4:28 | |
for a greater flexibility. | 4:31 | |
We were imploring the Japanese to appreciate the Yen, | 4:33 | |
in their interest as well as in our own | 4:37 | |
and so, President Nixon really had no choice | 4:40 | |
but to grasp the nettle himself. | 4:45 | |
This raises the question of the 10% surcharge | 4:48 | |
which President Nixon introduced along with his de facto | 4:53 | |
suspension of the curtain vertability of official gold. | 5:00 | |
In common with most economists, | 5:03 | |
I have reservations about protective tariffs, about quotas, | 5:08 | |
and about surcharges. | 5:13 | |
I go along with the conventional wisdom, | 5:16 | |
which says that depreciation of the dollar | 5:18 | |
relative to other currencies provides | 5:22 | |
the proper kind of protection which our industries need | 5:24 | |
in a time when our currency is overvalued | 5:28 | |
and that therefore it is redundant to also have a surcharge. | 5:31 | |
I don't think that for the purposes of revenue alone | 5:38 | |
a surcharge is very defensible in this modern age | 5:42 | |
and it certainly is calculated to annoy foreigners. | 5:46 | |
We economists should point out | 5:55 | |
that a good deal of this annoyance is irrational. | 5:56 | |
If they are not annoyed by the depreciation of the dollar, | 6:01 | |
they should not be annoyed by a surcharge | 6:06 | |
which has many of the same effects. | 6:09 | |
None the less, they are annoyed. | 6:13 | |
And yet, as I review the three weeks which have passed | 6:16 | |
since President Nixon announced his program, | 6:23 | |
it does become increasingly apparent | 6:25 | |
that without the surcharge as a tactical weapon, | 6:29 | |
the governments and central banks abroad | 6:35 | |
would not have been even so cooperative | 6:41 | |
as they have already been. | 6:43 | |
Considering that the Japanese central bank, | 6:47 | |
under instructions from the Japanese Government, | 6:51 | |
has paid out more than four billion dollars worth of Yen | 6:54 | |
to support the old parity of the Yen | 6:59 | |
taking on that number of unnecessary dollars. | 7:05 | |
We have to ask ourselves, | 7:09 | |
how obtuse, how recalcitrant would they have been | 7:10 | |
if there had not been the surcharge | 7:15 | |
to shape them into reality. | 7:18 | |
Very well then. | 7:23 | |
The initial first couple of weeks' impact | 7:24 | |
of the President's program has been on the whole, favorable. | 7:27 | |
I did detect when I was in London | 7:32 | |
something of a feeling of anticlimax | 7:34 | |
because once the foreign exchange markets were reopened, | 7:38 | |
once the dollar and all the currencies de facto | 7:42 | |
began to float, it turned out that the dollar | 7:46 | |
did not get itself depreciated very much, | 7:50 | |
vis a vis, other currencies. | 7:54 | |
The typical figure is three percent, four percent, | 7:58 | |
five percent, depending upon whether we're talking | 8:03 | |
about the pound or whether we're talking about | 8:06 | |
the continental currency | 8:09 | |
or whether we're talking about the Yen. | 8:12 | |
Was all this bother worthwhile for so minuscule | 8:15 | |
an amount of depreciation. | 8:19 | |
You certainly have to be a besotted admirer | 8:24 | |
of the classical mechanism of international exchange | 8:28 | |
to think that pici-unis changes of this magnitude | 8:32 | |
could compensate for a very large | 8:36 | |
overvaluation of the dollar. | 8:39 | |
Moreover, if we look at the German Mark, | 8:42 | |
we have to realize that prior to President Nixon's action, | 8:45 | |
it had already appreciated by about seven percent | 8:50 | |
and although I haven't reviewed and checked with | 8:55 | |
the very latest quotations, | 8:58 | |
my impression is that the German Mark, as I speak, | 9:00 | |
is at just about the same degree of appreciation | 9:04 | |
vis a vis the dollar as it was | 9:08 | |
before President Nixon's action. | 9:10 | |
So we've had no further improvement along that front. | 9:12 | |
A little wonder, then, that there is a sense of anticlimax | 9:16 | |
around the world. | 9:19 | |
It reminds me a bit of the phony war period | 9:21 | |
in World War Two from the end of August 1939, | 9:25 | |
beginning of September, when World War Two began | 9:29 | |
with the Nazi invasion of Poland | 9:33 | |
until the following spring, there was very little action. | 9:36 | |
The French were under the illusion that the Maginot Line | 9:41 | |
was holding and would hold | 9:45 | |
and the German's having, by blitzkrieg, gone through Poland | 9:46 | |
were gathering their strength for a blitzkrieg | 9:51 | |
through Norway and the low countries. | 9:56 | |
In the interval, it looked as if there wasn't | 10:01 | |
very much of any warfare going on. | 10:03 | |
That was, we now know, the calm before the storm. | 10:08 | |
In a sense then, I think that we should not be misled | 10:12 | |
by the moderation of the depreciations. | 10:17 | |
The story is not yet over. | 10:23 | |
I state that as a prediction, | 10:27 | |
but I also state that as a pious wish | 10:29 | |
because we have not yet had | 10:33 | |
the amount of adjustment that is needed. | 10:36 | |
It would seem, therefore, that one should | 10:40 | |
form a judgment as to what's going to happen | 10:45 | |
and what ought to happen | 10:49 | |
by considering what economic principle, | 10:51 | |
what economic analysis, economic theory tells us | 10:57 | |
is needed to change the situation which had prevailed | 11:01 | |
prior to President Nixon's actions of August 15th. | 11:07 | |
For this purpose, let me quote freely | 11:12 | |
from a small piece which I wrote | 11:17 | |
for the London Sunday Telegraph in the immediate aftermath | 11:20 | |
of the President's action. | 11:24 | |
As I read this over a few weeks later, | 11:28 | |
I have no particular cause to regret | 11:30 | |
that I shot from the hip when asked by the editor | 11:37 | |
to give my views and I should point out | 11:42 | |
that having necessarily having to shoot from the hip | 11:47 | |
without time to learn about | 11:51 | |
what the administration's own views were, | 11:55 | |
I certainly did not speak for the administration, | 11:58 | |
I never speak for the administration. | 12:03 | |
There are plenty of excellent economists | 12:06 | |
who are called upon to speak for the administration | 12:09 | |
and some of the things I said run contrary | 12:15 | |
to some of the things which subsequently | 12:19 | |
I heard the President's Press Secretary, state. | 12:21 | |
Well, let me quote freely from this particular report. | 12:28 | |
It's called The Dollar Crisis. | 12:32 | |
I began by saying that although speculators can be blamed | 12:35 | |
for the de facto suspension of convertibility, | 12:40 | |
the evaluation if you like, | 12:48 | |
the basic long run forces were that the dollar | 12:50 | |
had given every sign of being overvalued currency | 12:55 | |
for many many years | 12:58 | |
and what set the speculators off | 13:00 | |
was the news that our merchandise trade surplus, | 13:02 | |
which equilibrium would have to be whoppingly positive | 13:05 | |
and here I want to endorse the testimony | 13:08 | |
of just the last week of an expert in international finance, | 13:13 | |
Eduard Bernstein, very prominent consultant | 13:19 | |
on international finance to many governments, | 13:23 | |
formerly of the US Treasury, | 13:25 | |
formerly of the International Monetary Fund. | 13:28 | |
Although I had no knowledge of his position, | 13:30 | |
specific position at that time, | 13:34 | |
his views and mine turn out to be pretty, nearly the same. | 13:36 | |
That what we need for equilibrium | 13:42 | |
is a strong, positive surplus in our merchandise trade | 13:45 | |
and a strong, positive surplus | 13:51 | |
in our current balance overall. | 13:51 | |
Perhaps something like seven billion dollars | 13:58 | |
and of course, as the second quarter figures came out, | 14:01 | |
it became apparent to everybody | 14:05 | |
that we were not only very far from that number, | 14:07 | |
but we were actually going into the red, | 14:10 | |
into negative numbers for the first time since 1893. | 14:12 | |
This inevitably, set the speculators noses to twitching | 14:16 | |
and finally when the Royce Committee of Congress, | 14:21 | |
so the Joint Economic Committee, | 14:25 | |
came out with the flat-footed statement | 14:27 | |
that the dollar was overvalued and that if necessary, | 14:30 | |
there ought to be a revaluation, | 14:34 | |
even a revaluation of official gold, | 14:37 | |
the fact was in the fire. | 14:40 | |
I said for the readers of The Sunday Telegraph | 14:41 | |
that it would be instructive | 14:45 | |
if I were now to dream some dreams, so here I begin. | 14:46 | |
One, I said, the American dollar is to be lowered in value | 14:52 | |
relative to SDRs, that is paper gold and official tier gold | 14:57 | |
which incidentally must never again be confused | 15:04 | |
with the free market gold | 15:06 | |
of dentists, gangsters, and hoarders, | 15:07 | |
and if this lowering of value of the dollar, | 15:11 | |
this is a de facto and perhaps de jure devaluation | 15:14 | |
with respect to paper and official tier gold, | 15:20 | |
should be by the order of magnitude of say, 12%. | 15:23 | |
That was a good, generous figure. | 15:27 | |
I noticed that Dr. Bernstein doesn't go quite that far | 15:29 | |
and although I didn't know it at the time, | 15:36 | |
remember I was writing | 15:39 | |
in the immediate aftermath of the crisis, | 15:40 | |
Pierre Schweitzer, head of the International Monetary Fund, | 15:43 | |
had also been leaking to the press | 15:56 | |
the work of the experts in the International Monetary Fund | 16:00 | |
who hoped for at least a small de facto and de jure | 16:04 | |
official devaluation of gold. | 16:10 | |
It was that leaked to the press which elicited from | 16:15 | |
Mr Ziegler, the President's Press Secretary, | 16:17 | |
denial that the administration had any intention whatsoever | 16:21 | |
of changing the price of gold. | 16:26 | |
That was point number one in my dream. | 16:31 | |
Point number two, is the currencies | 16:35 | |
of the surplus countries, most notably, Japan | 16:38 | |
are not to change at all with respect to official gold. | 16:41 | |
Hence, the deficit-ridden American dollar | 16:47 | |
would thereby be depreciated by at least 12%, | 16:50 | |
relative to the currencies of the surplus countries. | 16:54 | |
Three, what about Canada | 16:59 | |
and the various New World currencies | 17:02 | |
that form the American block? | 17:04 | |
It would be presumed that these American block currencies | 17:07 | |
would go all or most of the way the the revalued dollar. | 17:11 | |
That is, they would be devalued | 17:16 | |
with respect to official tier gold by 10 or 12%. | 17:18 | |
This leads us, finally, with lots of intermediate countries, | 17:25 | |
countries such as Britain, | 17:29 | |
which had neither so hard a currency as the Mark or the Yen, | 17:31 | |
but not so soft a currency as the dollar | 17:35 | |
and they might be expected to go about halfway, | 17:39 | |
vis a vis official gold or that fraction of the way | 17:42 | |
which the degree of strength | 17:47 | |
of the balance of payments position of those countries | 17:48 | |
would seem to warrant. | 17:51 | |
I concluded my dream by saying, | 17:55 | |
there is no need to make exact guesses and judgments | 17:57 | |
in these initial resettings of parodies. | 18:01 | |
For it is high time the world should move to a regime | 18:05 | |
in which some flexibility of exchange rates | 18:08 | |
is the standard feature. | 18:10 | |
Whether this takes the form of crawling pegs | 18:12 | |
or freely floating exchange rates | 18:15 | |
or floating exchange rates subject to some intervention | 18:16 | |
by the respective governments and central banks | 18:21 | |
is not important. | 18:25 | |
Well now, my purpose was not to dream impractical dreams, | 18:29 | |
but I think that above dream tells us something | 18:33 | |
about the direction the pragmatic reality should aim for. | 18:36 | |
I went on to say, the first order of business | 18:42 | |
is appreciation of the Yen | 18:44 | |
and I must confess I could not believe the stubbornness | 18:47 | |
of the Japanese Government, | 18:52 | |
what seemed to be the willful ignorance. | 18:54 | |
I've since learned that there are | 18:58 | |
internal political reasons for that. | 19:00 | |
These consist not simply of the understandable pressure | 19:02 | |
from the export industries, from the shipping industries, | 19:07 | |
many of which have contracts and dollars. | 19:10 | |
For after all, any particular harm to those industries, | 19:13 | |
which the government doesn't wish to happen | 19:17 | |
could be compensated by subsidy. | 19:19 | |
There now is talk of some aid programs | 19:21 | |
to the victims of a Yen appreciation, | 19:25 | |
but the more important reason is more ephemeral, | 19:29 | |
namely that particular people in the Japanese Government, | 19:32 | |
in the administration, who are jockeying for the succession | 19:40 | |
to Prime Minister Sato, | 19:43 | |
have gone out on a limb in this regard | 19:45 | |
and so as long as they held power in the councils, | 19:49 | |
they had a personal interest which I may say is divergent | 19:54 | |
both from the national interest of Japan | 19:59 | |
and from the international interest of the world | 20:01 | |
to try ostrich-like to maintain the previous parody | 20:05 | |
of the Yen relative to the dollar. | 20:11 | |
Very well then. | 20:17 | |
We'll suppose that the, that the Yen is appreciated | 20:18 | |
by the amount roughly that I spoke of 10, 12, 15% | 20:23 | |
one now begins to hear. | 20:28 | |
The second order of business, I said, | 20:31 | |
and now remember I'm writing for European audience | 20:33 | |
is for all informed people abroad | 20:37 | |
to realize that a depreciated dollar | 20:40 | |
carries no threat of a massive invasion | 20:43 | |
of European markets by American goods and services. | 20:47 | |
I may say that I could only wish | 20:52 | |
that such a massive invasion of European markets | 20:55 | |
as a result of the kinds of exchange depreciates | 20:58 | |
that I'm speaking of could possibly | 21:01 | |
be feasibly in the cards. | 21:03 | |
For if such a massive invasion were feasibly in the cards, | 21:06 | |
it would enable us to restore equilibrium | 21:11 | |
with a more moderate adjustment of parodies. | 21:15 | |
Well, the sad truth is that it's not in the cards. | 21:21 | |
At the same time that European intellectuals | 21:28 | |
have been writing bestsellers on the challenge | 21:30 | |
of the American leviathan, | 21:33 | |
and have been bemused with America's competitive advantage | 21:35 | |
in the realms of computers and aircraft, | 21:42 | |
there are simple minds which cannot look beyond | 21:45 | |
the two most dramatic aspects of our technology | 21:48 | |
and civilization, namely computers and aircraft | 21:51 | |
and forget how little these are in total importance | 21:54 | |
relative to the total of goods in international trade | 21:58 | |
and relative to the total of goods in the GNP. | 22:00 | |
But while they were bemused with this American challenge, | 22:04 | |
of course I have referenced to Servan-Schreiber's book | 22:07 | |
on that, with that title. | 22:10 | |
The statisticians have been recording a steady | 22:13 | |
and almost unprecedented deterioration | 22:16 | |
in the competitiveness of American industry. | 22:20 | |
Take for example, our steel industry. | 22:23 | |
Let no one think that a five percent or a 10% | 22:26 | |
or even a 15% depreciation relative to the Yen | 22:31 | |
and half that much depreciation relative | 22:35 | |
to some other principle currencies | 22:37 | |
would mean that American steel is gonna begin to | 22:40 | |
land in European ports and Japanese ports | 22:42 | |
and Australian ports. | 22:46 | |
Our cost competitiveness is so far | 22:48 | |
from being of the order of a 15% that | 22:50 | |
that industry will still, I think, | 22:57 | |
be screaming for protection and economists like me | 23:00 | |
will still be objecting to favored treatment | 23:04 | |
of such industries. | 23:09 | |
Well, the dream world is over | 23:13 | |
in which industry abroad could flood our markets | 23:16 | |
and displace more American workers | 23:21 | |
under the illusion that accepting return | 23:26 | |
any amount of dollars, IOUs, if the process were generated, | 23:28 | |
that this could go on. | 23:32 | |
I had a letter from an old teacher of mine, | 23:34 | |
Professor Hobueller, I had said some unkind words | 23:36 | |
about the nine and neglect as ostrich-like policy | 23:40 | |
which should have been forseeably understood | 23:45 | |
not to be able to last | 23:51 | |
and Professor Hobueller wrote that he had a clear conscious | 23:54 | |
even though his pamphlet had used that title | 23:58 | |
because what's the matter so long as the rest of the world | 24:01 | |
will continue to send us goods for nothing. | 24:06 | |
Why should we not accept them? | 24:11 | |
And he went on to say in the teeth of the present crisis | 24:15 | |
that the Japanese want to go on accepting dollars, | 24:17 | |
that there was nothing wrong about, | 24:21 | |
I'm not quoting him correctly and with full qualifications, | 24:26 | |
the displacement of our industries by the Japanese imports. | 24:28 | |
My answer was that this represented | 24:36 | |
exactly the kind of thinking that I said was ostrich-like | 24:38 | |
because it was unbelievable that the Japanese | 24:41 | |
would in fact go on doing what they were doing | 24:45 | |
in the first days of the crisis, | 24:49 | |
namely buying for Yen any amount of dollars | 24:51 | |
thrust to them at the previous parody. | 24:55 | |
One must be realistic in making forecasts | 24:59 | |
and that process cannot last and I would not | 25:03 | |
disorganize any American industries | 25:07 | |
in the expectation that we would have perpetual dumping | 25:09 | |
of good Japanese goods on American consumers | 25:12 | |
that would last and of course it has not lasted | 25:19 | |
and would not last. | 25:23 | |
Now, I dreamt a pleasant dream of the outcome. | 25:26 | |
I may say that I don't wanna insist | 25:31 | |
upon the details of it here, | 25:32 | |
I have no particular brief for changing de facto or de jure | 25:34 | |
the price of official gold, | 25:40 | |
I just thought realistically that this was something | 25:41 | |
which the Europeans would accept more readily | 25:44 | |
and that it had none of the bad consequences | 25:49 | |
or almost none of the bad consequences of the previous | 25:51 | |
revaluations of gold before we had the two tier system, | 25:55 | |
but let me in concluding say, | 26:02 | |
that I also have a nightmare | 26:04 | |
and that nightmare is that the world will turn into | 26:09 | |
a chaos of exchange controls of trade wars | 26:14 | |
and a tendency towards universal autarchy | 26:19 | |
and already on my travels I have seen | 26:23 | |
that there is an increase | 26:25 | |
in the amount of exchange of controls. | 26:28 | |
So, that although unilateral action | 26:32 | |
by the President was necessary in grasping the nettle, | 26:35 | |
in throwing the ball into the court | 26:37 | |
of the Europeans and of the Japanese, | 26:40 | |
we do not have unilateral power to introduce | 26:42 | |
a nice state of flexible exchange rates | 26:45 | |
near to the proper equilibrium parodies. | 26:48 | |
We are in the same boat. | 26:53 | |
There is a problem of persuasion here | 26:54 | |
and the outcome is by no means optimistically clear. | 26:58 | |
If you have any questions or comments | 27:04 | |
for Professor Samuelson, address them to | 27:05 | |
Instructional Dynamics Incorporated | 27:08 | |
166 East Superior Street | 27:10 | |
Chicago, Illinois 60611. | 27:12 |
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