Tape 122 - Devaluation of the Dollar
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- | Welcome once again as MIT Professor Paul Samuelson | 0:02 |
discusses the current economic scene. | 0:05 | |
This bi-weekly series is produced | 0:07 | |
by Instructional Dynamics Incorporated. | 0:09 | |
This program was recorded February 22nd. | 0:12 | |
- | What did we used to talk about | 0:17 |
before there were recurrent international crises? | 0:18 | |
Again, since my last tape, | 0:23 | |
we've had another devaluation of the dollar. | 0:28 | |
This time, a 10% devaluation | 0:31 | |
adopted unilaterally by President Nixon. | 0:36 | |
This means that the price of official gold | 0:39 | |
has been raised from $38 an ounce to $42.22. | 0:44 | |
I make that to be 10% on the higher number, | 0:50 | |
or really a 1/9 increase in the price of gold. | 0:54 | |
Since the mark has stayed at the old parity | 0:59 | |
with respect to gold, | 1:03 | |
since the franc has stayed at that parity, | 1:04 | |
it means that, in effect, | 1:06 | |
the dollar has been depreciated by 10%. | 1:08 | |
It means that the mark and the franc | 1:12 | |
have been appreciated by 10%. | 1:14 | |
Even more important, the act by President Nixon | 1:18 | |
has provided the occasion to force the Japanese | 1:23 | |
into appreciating the yen. | 1:26 | |
The yen is now a floating currency. | 1:30 | |
Since the February action of President Nixon, | 1:34 | |
the yen has appreciated by some 16 odd percent. | 1:38 | |
Instead of 308 yen to the dollar, | 1:45 | |
now it's only 265 yen to the dollar. | 1:49 | |
What are we to think about this? | 1:55 | |
Is this a sign that we are in trouble? | 1:57 | |
Is this a sign of worse things to come? | 2:00 | |
Is it a good thing? | 2:04 | |
I must say that I regard these developments, | 2:06 | |
on the whole, as a good thing. | 2:10 | |
You know that I have thought for a long time | 2:14 | |
that the American dollar is overvalued. | 2:17 | |
I did believe that the Smithsonian depreciation | 2:22 | |
of the dollar, which took place | 2:25 | |
just a little more than 14 months ago, | 2:27 | |
was a step in the right direction. | 2:30 | |
I didn't think that we could justify | 2:33 | |
a bigger step in that direction | 2:35 | |
than took place there by agreement. | 2:37 | |
But we all knew, if we were sophisticated, | 2:42 | |
that the outcome could not be determined for a long time, | 2:47 | |
for two or three years. | 2:53 | |
As it happened, we have not been given the opportunity | 2:58 | |
to wait for that controlled experiment | 3:01 | |
to reach its fruition. | 3:03 | |
Because the American trade balance turned so bad | 3:06 | |
at the end of the year this last year, | 3:09 | |
because of the Italian difficulties, | 3:13 | |
which caused the Italian lira to float, | 3:15 | |
and the English difficulties, | 3:18 | |
which caused the English pound to float, | 3:20 | |
there grew up a conviction among the treasurers | 3:23 | |
of multi-national corporations | 3:28 | |
and on the part of anybody who had footloose capital | 3:30 | |
that the dollar was still in trouble, | 3:34 | |
that the Smithsonian medicine was not working, | 3:38 | |
that it was not going to work, | 3:41 | |
and that a very profitable speculation | 3:43 | |
would be to be to transfer your money into marks or yen. | 3:48 | |
Yen would be even better than marks, | 3:53 | |
but it's not so easy to do. | 3:55 | |
And as a result, you stand to make | 3:58 | |
a handsome overnight profit if the dollar is toppled. | 4:03 | |
If, by chance, the United States | 4:08 | |
and the Principal Central Banks of the IMF | 4:11 | |
are able to withstand the speculative raid, | 4:14 | |
then you have very little to lose | 4:17 | |
except your time and some commissions. | 4:20 | |
It constitutes, more or less, a one way bet. | 4:25 | |
Now, you would say that being the case, | 4:30 | |
how can any stable exchange rates | 4:32 | |
hope to stand up next year? | 4:35 | |
Perhaps it will be the turn of the mark to be toppled. | 4:39 | |
I don't think we have to be as pessimistic as that. | 4:43 | |
We can agree that any pegged exchange rate | 4:46 | |
is likely to get into trouble. | 4:48 | |
But I think we can also agree that the speculator | 4:50 | |
who is betting on the right fundamental side | 4:54 | |
is more likely to have things going his way | 4:57 | |
than just the speculative mob | 5:00 | |
who tried by their own action | 5:02 | |
to create a self-fulfilling prophecy. | 5:04 | |
And so I believe, | 5:09 | |
if there had not been legitimate grounds | 5:10 | |
for apprehension, that the dollar was still overvalued, | 5:12 | |
then the speculators could not have toppled | 5:18 | |
this particular rate. | 5:20 | |
Since I have been one of those | 5:24 | |
who have been disappointed by the slowness | 5:26 | |
of the Smithsonian medicine to work, | 5:31 | |
I must confess that the devaluation | 5:35 | |
did not take me by surprise. | 5:39 | |
Before it happened, | 5:43 | |
I was interviewed by one of the TV stations, | 5:45 | |
and I had candidly to say | 5:52 | |
that I thought that the odds were 50/50 | 5:54 | |
that the dollar would be depreciated | 5:57 | |
and that the other currencies would be appreciated. | 6:00 | |
That wasn't very news-worthy at the time, | 6:03 | |
and that part of the interview | 6:06 | |
wasn't carried over the network. | 6:10 | |
But when a few days later, after one weekend, | 6:13 | |
the President made his surprise announcement, | 6:18 | |
they took out the old recorded film | 6:21 | |
and put it on television and said, | 6:28 | |
"Remember, you learned it here first." | 6:30 | |
Well, of course there was no journalistic beat scored there. | 6:33 | |
I didn't know whether the dollar would be devalued. | 6:38 | |
And the multi-national treasurers | 6:41 | |
didn't know whether it would or not. | 6:44 | |
But it was a good bet. | 6:46 | |
Let's look forward. | 6:50 | |
If the Smithsonian medicine didn't work, | 6:53 | |
does that mean that the new medicine devaluation | 6:56 | |
also will not work? | 7:00 | |
I think you can get plenty practical men of affairs | 7:02 | |
in and out of Wall Street | 7:05 | |
in many capitals of the world | 7:07 | |
who really believe that. | 7:09 | |
They believe that depreciation of the currency | 7:10 | |
has been proved to be incapable | 7:13 | |
of bringing balance into the American balance of payments. | 7:17 | |
Perhaps that's one of the ways | 7:23 | |
of interpreting the Wall Street market. | 7:25 | |
I was actually in Washington | 7:28 | |
on the morning of the announcement, | 7:31 | |
and at a meeting where I was, | 7:33 | |
a person came in and said, | 7:37 | |
"Oh the market is up $21 on the Dow Jones already." | 7:38 | |
And he was rubbing his hands with approval of that. | 7:44 | |
He came back a couple of hours later and said, | 7:49 | |
"Well, it's only up $10 now." | 7:51 | |
And then by the end of the day, it was only up $5. | 7:52 | |
And as you know if you follow Wall Street, | 7:56 | |
since that time, the market | 7:59 | |
has taken several quite bad tumbles. | 8:01 | |
The non-economist doesn't believe | 8:06 | |
that the economic medicine is going to work. | 8:09 | |
Or at least part of him doubts that it will work. | 8:13 | |
Is this a well-founded belief? | 8:17 | |
Before discussing that, | 8:20 | |
let me analyze some differences of opinion | 8:21 | |
that appear among economists themselves. | 8:27 | |
I believe that most of the Nixon team | 8:32 | |
think that the devaluation is a good thing. | 8:35 | |
They think that America is better off at the end of February | 8:38 | |
than it was at the beginning of February. | 8:44 | |
They think that not only is it a good thing | 8:46 | |
for the United States, | 8:49 | |
which has an overvalued currency, | 8:50 | |
but the changes precipitated by the President's action | 8:52 | |
will be a good thing for Japan and for Germany | 8:57 | |
with their undervalued currencies. | 9:01 | |
Because it's helpful to a surplus country | 9:05 | |
in the last analysis to reduce its surplus | 9:10 | |
to move towards equilibrium. | 9:14 | |
Just as it's helpful to a deficit country, | 9:17 | |
in the last analysis, to remove the deficit | 9:20 | |
and to move towards equilibrium. | 9:22 | |
This is one of these rare international cases | 9:25 | |
where, properly looked at, | 9:28 | |
there can be a long-run community of interests | 9:30 | |
rather than a conflict of interest. | 9:33 | |
On the whole, I share this view of the administration. | 9:38 | |
As you know, I don't agree with all actions, | 9:43 | |
but I try not to be perverse | 9:47 | |
and if an action seems to me a good thing, | 9:50 | |
then I have no hesitation in saying so. | 9:54 | |
However, there is a school of thought | 9:57 | |
which says that the Smithsonian action was okay. | 10:00 | |
Let me mention the name of Richard Cooper. | 10:09 | |
He's the provost of Yale University, | 10:13 | |
second in command there to Kingman Brewster. | 10:16 | |
He's a Professor of Economics. | 10:18 | |
He's a distinguished economist, I suppose, in his late 30s. | 10:20 | |
There is not a more respected international finance expert | 10:27 | |
within the academic profession than Richard Cooper. | 10:32 | |
And when Richard Cooper disagrees with my views, | 10:36 | |
I listen with care. | 10:39 | |
Dr. Cooper thinks that the Smithsonian depreciation | 10:43 | |
of the dollar was about as much, | 10:49 | |
was at the outer limits, | 10:52 | |
of what is economically optimal or even defensible. | 10:54 | |
He did not then believe that the dollar | 11:00 | |
was as seriously overvalued | 11:05 | |
as people like me have believed. | 11:07 | |
And he thinks that the Smithsonian medicine was working. | 11:12 | |
He says, "Nobody had any right to expect it | 11:17 | |
"to be working these last 14 months | 11:21 | |
"any better than it actually did." | 11:26 | |
He calls our attention to the fact | 11:30 | |
that we've had a strong upswing in the United States. | 11:32 | |
That is an important reason | 11:38 | |
why our balance of payments has deteriorated. | 11:40 | |
I have to agree with that. | 11:44 | |
He calls our attention to the fact that Europe, | 11:45 | |
while we have been zooming, | 11:51 | |
has been in a period of delayed expansion. | 11:53 | |
Of relative stagnation. | 11:57 | |
This, too, is an exogenous factor | 11:59 | |
contributing to the bad performance | 12:03 | |
of the American balance of payments. | 12:07 | |
He points out a third thing, also unimpeachably true. | 12:11 | |
Dr. Cooper points out that when you depreciate a currency, | 12:18 | |
even if it's going to do you a lot of good in the long run | 12:28 | |
in improving your balance of payments, | 12:31 | |
in the short run, in the shortest run, | 12:33 | |
that depreciation is going to make the patient look sicker. | 12:36 | |
Why? | 12:41 | |
In the short run, the patterns of physical trade | 12:43 | |
have no time to change. | 12:46 | |
Goods are on their way, contracts are made. | 12:47 | |
Immediately, then, the same goods | 12:53 | |
that we buy from abroad become more expensive to us | 12:55 | |
when the dollar has been depreciated. | 12:59 | |
That seems to make our balance of trade worse, not better. | 13:02 | |
Likewise, but I warn you | 13:06 | |
this is a very tricky kind of comparison. | 13:09 | |
You have to decide whether | 13:10 | |
you're going to compare things in dollars | 13:12 | |
or whether you're going to compare things | 13:14 | |
in the foreign currency, | 13:15 | |
but in any case, there can be an appearance | 13:19 | |
that America is selling her goods for lower prices abroad. | 13:22 | |
That means if we keep the same dollar prices, | 13:29 | |
and the dollar is depreciated, | 13:32 | |
then we are really giving away our goods for less. | 13:34 | |
The terms of trade are turning against the United States | 13:38 | |
as economists say, in technical parlance, | 13:41 | |
and there is not, in the short run, | 13:44 | |
to compensate for this, and to over-compensate for this, | 13:46 | |
a swing in the physical volume of our trade | 13:50 | |
toward an increased physical volume of exports | 13:55 | |
and a decreased physical volume of imports. | 13:59 | |
According to Dr. Cooper, | 14:04 | |
the short run is longer than some people have thought, | 14:06 | |
and 14 months is a very short time. | 14:10 | |
So Dr. Cooper is very candid in saying that in his view, | 14:12 | |
the devaluation was a great mistake. | 14:19 | |
In his view, the speculators were impatient. | 14:22 | |
They were too impatient. | 14:26 | |
In his view, the governments of the world | 14:27 | |
should have taught the speculators a lesson. | 14:30 | |
It should not have made their paranoid suspicions | 14:33 | |
self-fulfilling sources of profit. | 14:39 | |
Make no mistake about it, | 14:42 | |
there have been some very large profits made. | 14:43 | |
If you have a position in marks of several million dollars, | 14:46 | |
I'm thinking now of even private individuals, | 14:53 | |
and if you have this on borrowed money, | 14:56 | |
then you have, in a very short period of time, | 14:59 | |
on a highly leveraged margin, made a tremendous profit. | 15:02 | |
Dr. Cooper is not alone in this view. | 15:14 | |
In the companion IDI tapes, | 15:18 | |
many of you will have heard Professor Milton Friedman, | 15:21 | |
Professor Friedman was in Japan last year, | 15:26 | |
he reported on his observations | 15:28 | |
as to whether the yen was still greatly undervalued | 15:31 | |
relative to the American dollar. | 15:37 | |
And Professor Friedman is a patient man, | 15:39 | |
unlike the impatient people that Dick Cooper criticized, | 15:43 | |
Professor Friedman is a man | 15:48 | |
who can look below the surface and around the corner, | 15:49 | |
and when Professor Friedman | 15:53 | |
looked at the relative stability of our wages and prices, | 15:56 | |
true, we've been having inflation, | 16:02 | |
but we've been having the slowest rate of inflation | 16:03 | |
of any of the countries that we're talking about. | 16:06 | |
Whether it be Germany, France, or Japan, | 16:10 | |
the United States' cost level has been going up more slowly. | 16:14 | |
We've had a nice increase in our productivity | 16:18 | |
in this business cycle expansion. | 16:21 | |
And so Professor Friedman on a number of occasions | 16:23 | |
has indicated that he thinks | 16:27 | |
that if we can only wait the requisite year or years, | 16:30 | |
that it may turn out to be the case | 16:38 | |
that the dollar would be no longer an overvalued currency. | 16:41 | |
In that case, the devaluation most recently | 16:45 | |
would not, itself, be optimal. | 16:49 | |
Of course, a person who believes in flexible exchange rates | 16:53 | |
and floating exchange rates, like Professor Friedman, | 16:57 | |
doesn't have to make up his mind on these issues. | 17:00 | |
He doesn't even have to be right | 17:03 | |
if he does make up his mind on these issues, | 17:05 | |
because he would let the free market take care of this. | 17:08 | |
And a person of that persuasion | 17:13 | |
would undoubtedly, | 17:16 | |
even if he thought that the devaluation | 17:18 | |
of the dollar might've been unnecessary, | 17:21 | |
or even if he agreed with Dr. Cooper | 17:24 | |
that a year or two down the road | 17:26 | |
will find retaliatory devaluations by our trading partners, | 17:29 | |
then such a person will still approve of the devaluation | 17:37 | |
because of what came in its train. | 17:41 | |
The big thing that happened | 17:46 | |
was not the nominal change in the price of gold. | 17:47 | |
It was not the devaluation | 17:51 | |
of the American dollar relative to the franc. | 17:53 | |
The big thing was that the Japanese | 17:55 | |
were forced into floating. | 17:58 | |
The Prime Minister had said | 18:02 | |
that he would not appreciate the yen any further. | 18:03 | |
That was a rash thing for a political leader to say. | 18:08 | |
It was bad economics for him to have said that. | 18:11 | |
President Nixon has forced his hand. | 18:16 | |
You might say that President Nixon has saved his face | 18:19 | |
because although there has been a political uproar | 18:23 | |
and a request that the Prime Minister retire, | 18:29 | |
because of a lack of confidence, | 18:34 | |
because he has gone back, | 18:35 | |
all he, in fact, has had to do | 18:37 | |
with his still comfortable majority | 18:39 | |
is to apologize for his failure. | 18:41 | |
And who's to say that when he first met | 18:44 | |
with Undersecretary Paul Volcker, | 18:47 | |
that he wasn't secretly pleased | 18:50 | |
that the President's precipitous action | 18:53 | |
got him, the Japanese Prime Minister, | 18:56 | |
off the hook? | 18:59 | |
The American dollar is now floating | 19:03 | |
relative to four of our six major trading partners. | 19:06 | |
You will say, no, those four currencies are floating | 19:14 | |
relative to the American dollar. | 19:18 | |
I believe that these are exactly the same things. | 19:21 | |
From day to day, | 19:27 | |
if the Japanese yen can change in its price, | 19:27 | |
then the dollar is changing relative to the yen. | 19:32 | |
As Einstein said, everything is relative. | 19:34 | |
Canada has a long tradition of floating. | 19:38 | |
And, by the way, it's the Canadian surplus | 19:42 | |
which is part of our trade balance picture. | 19:45 | |
Japan is now floating. | 19:52 | |
Italy and England are floating. | 19:55 | |
The Swiss, very kay-jo-lee, to keep from having | 20:00 | |
to swallow so many dollars as volatile funds came in, | 20:05 | |
immediately let their currency float. | 20:10 | |
And that doesn't tell the whole story | 20:13 | |
because if we turn to many other currencies | 20:15 | |
which are nominally stable, | 20:18 | |
they are on a split currency basis. | 20:21 | |
And at least as far as Capital Account is concerned, | 20:25 | |
they are also floating. | 20:27 | |
I'm referring to the French franc, | 20:30 | |
the Belgian franc, the Dutch guilder. | 20:32 | |
And still others. | 20:36 | |
So I have to agree that we are in a better situation | 20:38 | |
at the end of February | 20:46 | |
than we were at the beginning. | 20:48 | |
I myself would not consider it a tragedy | 20:52 | |
if Dick Cooper turned out to be right, | 20:54 | |
and the new medicine, on top of the Smithsonian medicine, | 20:57 | |
began in two years to work so powerfully | 21:02 | |
that it became some other country's turn | 21:07 | |
to depreciate or to devalue. | 21:11 | |
I put not premium upon pegged stability. | 21:14 | |
And given the fact that for a dozen years | 21:18 | |
the American dollar has been overvalued, | 21:23 | |
given the great overhang of dollars abroad, | 21:25 | |
it would seem to me to be most offensible | 21:29 | |
if you're gonna make an error, | 21:34 | |
to make an error on the side of undervaluation | 21:35 | |
of the dollar at this point of the game, | 21:40 | |
rather than overvaluation. | 21:42 | |
Now, Dr. Cooper will point out, | 21:44 | |
and he will point out cogently, | 21:46 | |
that the others are not very likely | 21:48 | |
to let us get away with an undervalued dollar. | 21:51 | |
Well, let's put it to them, and in any case, | 21:55 | |
it is premature, in my judgment, to worry about that. | 21:58 | |
Economic theory suggests important hypotheses | 22:07 | |
about the real world. | 22:14 | |
Generally speaking, it cannot prove the truth | 22:17 | |
of any of those hypotheses. | 22:21 | |
And at a deeper level, | 22:24 | |
I think that it is my duty. | 22:26 | |
My conscience as a scientist | 22:29 | |
requires me to go into the possibility | 22:31 | |
that the conventional wisdom among economists, | 22:35 | |
I'm now speaking of academic economists, | 22:40 | |
not of central bankers, may be wrong. | 22:42 | |
There's been a long debate | 22:46 | |
all through the quarter century since World War II | 22:48 | |
as to whether one should be an elasticity optimist | 22:52 | |
or an elasticity pessimist | 22:57 | |
in connection with international trade. | 22:59 | |
What that means is that depreciations, | 23:02 | |
and small depreciations, | 23:07 | |
do the most in correcting | 23:09 | |
balance of payments disequilibrium. | 23:10 | |
If you could be, as the classic economists tended to be, | 23:12 | |
an elasticity optimist, | 23:16 | |
if you thought that a small change in the prices quoted | 23:18 | |
relative to the prices quoted abroad | 23:22 | |
would generate a tremendous swing in physical exports | 23:24 | |
and a tremendous swing in physical imports, | 23:28 | |
these are opposite directional swings | 23:32 | |
of the physical imports and exports, | 23:36 | |
then you would believe that pegged exchange rates | 23:39 | |
and proper domestic policies | 23:46 | |
would not be such a bad combination. | 23:48 | |
Perhaps you would think even better | 23:51 | |
would be unpegged exchange rates. | 23:53 | |
But it would be quite easy to run the world | 23:55 | |
if that was the way the world was. | 23:57 | |
Now, at the other extreme, | 24:00 | |
we have elasticity pessimists. | 24:02 | |
The elasticity pessimists, if they were right, | 24:05 | |
say that when you depreciate you cause changes in prices. | 24:07 | |
But there are very small changes in the physical quantities | 24:11 | |
that then take place | 24:16 | |
in order to compensate for these changes in prices. | 24:18 | |
A real elasticity pessimist would believe that depreciation, | 24:21 | |
even in the longest run, | 24:26 | |
will make the currency worse rather than better. | 24:27 | |
Now, Dr. Cooper's position, | 24:32 | |
the one I mentioned earlier, is in-between. | 24:35 | |
He's essentially, over the longer-run, | 24:38 | |
an elasticity optimist. | 24:40 | |
But in the shorter-run, he is an elasticity pessimist. | 24:42 | |
But he points out, cogently, | 24:46 | |
that the long-run is longer than the short-run. | 24:48 | |
What about the possibility that even in the longest run, | 24:53 | |
the elasticities, though they'd be greater | 24:59 | |
than that of the pessimists, | 25:03 | |
are not as great as that of the optimists? | 25:04 | |
With the result that you may get very little benefit | 25:08 | |
from depreciation, | 25:13 | |
you might get no benefit, | 25:16 | |
that's perhaps too extreme a case, | 25:17 | |
but it might be that, as we say in technical parlance, | 25:19 | |
that the Marshall-Lerner sum of elasticities | 25:22 | |
are very little above the critical level of unity. | 25:27 | |
The critical level at which the depreciation | 25:33 | |
can do any good. | 25:36 | |
In that case, we've still got a very long row to hoe, | 25:38 | |
and there may be room | 25:43 | |
for a lot more destabilizing speculation. | 25:46 | |
It also may mean that the adjustments | 25:51 | |
that the United States will have to make | 25:53 | |
in order to get its house in order | 25:55 | |
will be of a greater order of magnitude | 25:59 | |
than most people in Washington, | 26:02 | |
and most people in Wall Street, | 26:05 | |
and most people in Main Street, | 26:06 | |
and most people in the Ivory Tower, | 26:08 | |
have thought. | 26:10 | |
I cannot rule out that hypothesis. | 26:12 | |
All I can do is review the evidence | 26:15 | |
for elasticity optimism. | 26:17 | |
Let me devote a few minutes to reviewing that estimates. | 26:23 | |
The first post war econometric estimates | 26:28 | |
tended to be in the direction of elasticity pessimism. | 26:31 | |
The shoe was on the other foot in those days, | 26:37 | |
it was a case then of an undervalued American dollar, | 26:38 | |
a case of so-called dollar shortage. | 26:43 | |
And the first econometric estimates | 26:46 | |
seemed to come out with the rather pessimistic conclusion | 26:49 | |
that elasticities were so small | 26:55 | |
that exchange rate adjustments | 26:57 | |
would be likely to do very little, | 26:59 | |
if indeed they didn't make things worse. | 27:01 | |
Then came a group of scholars | 27:04 | |
who examined those econometric estimates, | 27:06 | |
and they found that there were | 27:08 | |
purely technical statistical reasons to discount them. | 27:10 | |
They were technically biased in their identifications | 27:17 | |
in the direction of creating an impression | 27:22 | |
of greater inelasticity than was actually the case. | 27:26 | |
And so, after the 1949 worldwide depreciations | 27:32 | |
of currencies against the dollar, | 27:39 | |
and after that turned into a reversal | 27:41 | |
of the surplus of the American balance of payments | 27:45 | |
to a chronic deficit, | 27:48 | |
the pendulum began to swing over | 27:51 | |
towards more elasticity optimism. | 27:53 | |
Course there's some people who are impressed | 27:56 | |
by no evidence. | 27:58 | |
They have their opinions already formed, | 27:59 | |
in technical terms, they have beige improbabilities | 28:03 | |
that are such that any new observation | 28:06 | |
can make almost no change. | 28:09 | |
They're content to have | 28:11 | |
Professor Hablura Maridess from Harvard | 28:13 | |
assure them that his earlier generation | 28:16 | |
was assured by Alfred Marshall and Cambridge | 28:21 | |
that it stands to reason that elasticities are elastic. | 28:23 | |
Well, nothing stands to reason in the real world. | 28:28 | |
No sound methodologist believes that by a priori reasoning | 28:33 | |
you can make the falling apples of nature | 28:38 | |
correspond to your predilections and beliefs. | 28:41 | |
So it remains an open question. | 28:45 | |
When the British depreciated a few years back, | 28:48 | |
and after a delay their balance of payments | 28:52 | |
began to improve, | 28:56 | |
the side of elasticity optimists | 28:57 | |
seemed to swell a bit. | 29:00 | |
Of course, recently for a variety of reasons, | 29:02 | |
not all of them bearing upon this debate, | 29:07 | |
the British have lost their favorable balance of payments. | 29:09 | |
Any view which can have its adherence grow in number | 29:14 | |
as a result of short-run events | 29:22 | |
obviously can lose adherence | 29:24 | |
by the same kind of reversed short-run events. | 29:27 | |
And I think we have to be left, | 29:32 | |
particularly when we take into account | 29:34 | |
the disappointments of the last 14 months, | 29:36 | |
disappointments which, | 29:40 | |
if you go back and do as I did recently, | 29:42 | |
scrutinize the writings just 14 months ago of people, | 29:44 | |
of what they really expected to be the case, | 29:47 | |
looked at the computer forecast, | 29:49 | |
then looked at the reality, | 29:51 | |
then I think you have to agree | 29:53 | |
that some evidence against elasticity optimism | 29:57 | |
has been piling up. | 30:03 | |
I want to be cautious, however, | 30:05 | |
and stress the fact that there is no conclusive evidence | 30:11 | |
showing that elasticity optimism is wrong. | 30:15 | |
It's just that the betting odds in Las Vegas | 30:18 | |
of the most rational man | 30:22 | |
has to take into account the possibility | 30:24 | |
that this is not the case at the present state of the world. | 30:28 | |
We're left, I think, as in any court of equity, | 30:33 | |
with the requirement to exhaust all remedies | 30:37 | |
before we seek even more violent remedies. | 30:41 | |
And I think we should give a good chance, | 30:45 | |
I mean this is my advice if asked by governments, | 30:47 | |
and I mean by governments abroad, | 30:52 | |
that the floating exchange rates, | 30:54 | |
which are now widely prevalent, | 30:58 | |
will move to levels that will prove to be more realistic, | 31:00 | |
more maintainable, | 31:08 | |
and that the devaluation of the dollar is a good thing. | 31:09 | |
My final word must be this: | 31:14 | |
I hope you noticed, when the announcement came, | 31:17 | |
that along with the announcement of devaluation, | 31:19 | |
there came the announcement | 31:21 | |
that we were gonna get rid of our capital controls. | 31:22 | |
And I'm sure that the ideological antipathy | 31:25 | |
towards those controls | 31:27 | |
was an important part of the motivation | 31:29 | |
to explain why President Nixon | 31:31 | |
did what he did in February 1973. | 31:34 | |
- | If you have any comments or questions | 31:40 |
for Professor Samuelson, address them to | 31:42 | |
Instructional Dynamics Incorporated, | 31:44 | |
166 East Superior Street, Chicago, Illinois, 60611. | 31:46 |
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