The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
For lelease on Delivery
(Approximately 4:03 p.m. E.S.T.
Wednesday, November 19, If65)
The 19701s :
Reasonable Expectations
Remarks by J. Dewey Daane
Member, Board of Governors of the Federal Reserve System
Before the Lombard Association
Great Eastern Hotel
London, England
on Wednesday, November 19, 1969
The 197 )'s:
Reasonable Expectations
By J. Dewey Daane*
It is a real privilege and pleasure for me to have the opportunity
tonight to address this distinguished group of international bankers.
But it also is with considerable temerity, as well as much trepidation,
that I take a look forward with you at possible developments in the
1970's on both the international and the United States' domestic
financial horizons*
For I well recall that many in the United States
a decade ago were confidently talking of the 'soaring 6)'s}!, or even
the 'sizzling 60 's1', and then within a year were watching a presidential
campaign in which the winner stressed the need to get the country
moving again!
In retrospect, the 61's did indeed finally soar, to be
sure, but with far too much of the impetus and momentum of the upthrust
attributable to the seduction and piracy of inflation and--in the
United States at least--to the undesirable stimulus of war expenditures.
That is why I have deliberately chosen the topic ’Reasonable Expectations'1
rather than "Great Expectations*1, which might have been a more logical
choice in this London setting.
And I hasten to add that the only
expectation of which I am completely certain of realization is that
developments in the 197 )'s will, at best, only correspond in the
roughest outline to anything we can now foresee, reasonably or no,
^Member, Board of Governors of the Federal Reserve System. I am
grateful to several members of the Board's staff for assistance in
the preparation of these remarks--particularly to Mr. Louis Weiner,
Mr. Arthur Hersey, and Mr. Lyle Gramley.
and that we shall continue to find ourselves confronted both at home
and abroad with the unforeseen and unforeseeable.
Against these caveats, however, let me try to look forward with
you tonight to what we may reasonably expect to see in the 1970's.
From my standpoint it would be much easier, and obviously safer, if
one could make an heroic abstraction and leap over the intervening
years to focus only on the latter part of the 197)'s.
But in fact
I do not think this is feasible, for much of the shape and shadow of
the developments to come on both the domestic and international
monetary scenes will be dependent on what occurs in the intervening
years.
Taking the United States as an example, the developments
during the late 1973's will be closely related to the contour of the
economy in the early part of the decade and, specifically, to how
well we meet the present challenge to find ways and means of reconciling
our objectives of avoiding inflation, promoting employment, assuring
sustainable economic growth, and achieving balance of payments
equilibrium.
Perhaps it is provincial of me, but I think that the course of the
United States economy, and our success at home in developing appropriate
policies to meet the challenges confronting us, will have considerable
impact on the international financial scene as well.
Consequently, I
am going to begin with an inward, but forward, look at the U. S.
economic situation as a preface also to what I will have to say later on
concerning the international monetary system.
-
3
-
"The other side of the valley", as you may know, is the currently
fashionable phrase in Washington and New York to describe the economic
pickup that is expected to follow the economic slowdown which fiscal
and monetary policy have been aiming at and many believe is already
underway.
Those who use this phrase are often the people who are
skeptical that any lasting good--in the way of stabilization of the
price level— will come of the Administration's and the Federal Reserve's
efforts to check inflation.
The pressures toward higher money wages
and profits are so strong, they think, and the universal commitment of
modern governments to something near full employment is so binding, that
they feel sure that the American economy will soon be rolling furiously
up that hill on the other side of the valley-starting slowly, perhaps,
but then going faster and faster.
If that is really what is going to
happen, my hopes for the 1970's are not very likely to come true, either
for the United States or the rest of the world.
Let me explain.
We have had an earlier preview of the risks concealed by the phrase,
"the other side of the valley".
Economic policy in 1966 succeeded in
achieving during 1967 a slowdown in the pace of growth and a pause, for
a few months, in the rise in wholesale prices.
For nine or ten months
we also had a slight decrease in imports after what had been a very
steep increase.
But by the end of 1967, prices and imports were both
shooting up again.
It is not easy to judge just how strong the underlying
demand pressures in the U. S. economy are at any given moment, and
-
4
-
steering policy on the narrow course of maximum employment without
inflation is difficult if not precarious.
We missed the right course
rather badly, in 1967* and we compounded our mistake in the last half of
I960,
We must make sure that similar mistakes do not recur this time.
For my part, I am not convinced that the 'valley'1 nor? ahead of us is
going to be as pleasant--in other words as shallow or quickly traversed-as is popularly predicted, nor the ascent on the other side easily
achieved without a great risk of regenerating inflationary pressures.
Here in Britain you seem to have tackled a similar problem and,
after several unsuccessful tries at it, to be doing rather well.
Your
fiscal and monetary restraints have been really tough, and as far as I
can judge you have achieved a real change both in expectations concerning
the course of prices and in the balance of payments--yet x/ithout producing
an untenable rise in unemployment.
There is surely much to be learned
by reflecting on the differences between your situation and ours, as
well as on our similarities, so as to understand in some degree those
elements which have contributed to your success which may possibly be
relevant for us, and those which may not be.
Am I not right in thinking that one very important difference why,
in your case, limiting price increases has more immediate balance of
payments effects is that for you exports of goods and services are equal
to about
per cent of gross national expenditure, while for us the
proportion is less than 5 per dent?
Once you were on the road to a
-
5
-
healthy gtowth of exports, there must have been powerful leverage working
in your favor:
the more you could restrain domestic spending and bidding
up of prices, the better your export orders became and the surer your
protection was against an unacceptable increase in unemployment.
It is
precisely because foreign trade is not one of our main lines of business
in the United States, comparatively speaking, that I feel that your
experience is less applicable to us and the road ahead of us may prove
quite different.
For the U. S. the question is how long a period, and
what degree, of restraint of domestic demand will we need to get back
to relative stability in the general price level?
the meantime to our employment and unemployment?
What will happen in
Even if restraints
are adequate to the domestic economic problems, when can we expect real
improvement in our balance of payments?
In a sense, too, it can be fairly said, I believe, that we are not
as independent of the rest of the world as you are.
paradoxical.
This may seem
But the hard kernel of the truth in this is that we must
respect the role of the dollar at the center of the international monetary
system.
In your case, when the time came, you were able to alter the
exchange parity of the pound sterling against the world's other currencies.
The stimulus which that gave your exports worked hand in hand with your
fiscal and monetary policies to restore financial stability without
economic contraction and to improve your balance of payments position.
We, on the other hand, must assume a passive role on exchange rates and
it is other countries that set their rates in terms of the main reserve
and transactions currency, not vice versa.
This seems to me inherent in
the present structure of the system and in the economic weight of the
U. S.
It is true even apart from the fact that any implied rise in the
monetary price of gold in the United States, and every other devaluing
country following suit, would strike a crippling blow at the efforts
we have all been making to retain the proven advantages of an inter
national monetary system based on the present gold price and related
relatively stable exchange rates, while moving forward to meet the
growth needs for reserves in a way that undergirds the system.
The consequence is that we must rely, as we have, on maintaining
a better price performance than our neighbors overseas if we are to
keep our economic growth path and balance of payments in line.
But our own efforts to get our economy back on the path of growth
without inflation, and to get our international payments into balance,
can be blunted, or even thwarted, by the policies and actions of others.
As to what kinds of reinforcing actions would be helpful the question
answers itself.
We need a general climate of price stability in world
-
7
-
markets, to which others as well as we ourselves must contribute.
We
need a steady expansion of demand in world trade, and also liberalization
of trade practices and dismantling of uneconomic barriers.
We naturally
anticipate devaluations will occur— they seem to come--as other currencies
get out of line.
Beyond this, revaluations of currencies of countries
in surplus when their surpluses become structural may be appropriate from
time to time in the interest of the international monetary system.
its tardiness the recent German action is a case in point.
Despite
For "downward
only" exchange rate adjustments make the system untenable and make even
more difficult, if not impossible, the U. S. task of pressing toward
sustainable equilibrium in our balance of payments.
There is, in fact, a very general and extremely widespread inability
to conceive the reality and comprehend the significance of the shrinkage
of the U. S. current account balance— strictly, I should say, the balance
on goods and services--which has declined from a $7 billion average in
the years 1963 to 1965 to only $2-1/2 billion in 1968 and then to an
annual rate of $1-1/4 billion in the first half of the present year.
Next year we hope for a balance somewhat larger than in 1968, under
a favorable conjunction of demand forces at home and abroad.
It is
perhaps not surprising that this "sea-change" (a rather nice euphemism
for deterioration) our international accounts have suffered has been
rendered invisible by the astoundingly large inflows of private capital
to the United States that have occurred since the middle of 1967.
Unfortunately the character of these inflows is not necessarily durable,
-
8
-
dependent as they were on the pressures our Government put on U. S,
business corporations to finance their foreign investments with foreign
borrowing, on the attraction of funds to our stock market, or on the
pulling in of funds through the Euro-dollar market.
The small size of
our current account balance, on the other hand, is a too too solid fact,
reflecting the impact of the excess demand we have experienced in recent
years on the structure of our costs and prices relative to those abroad.
It is depressingly illustrated by the failure of the goods and services
surplus even to equal the $4 billion annual net outflow of Government
credits and economic grants, to say nothing of the annual outflows of
private capital.
Perhaps this gives you some indication of what I mean by the challenges
ahead.
We cannot, at this moment, foresee how long it will take to get
back on a path of steady growth with reasonable price stability, nor
how long it will be before our international payments reach a viable
equilibrium.
With unremitting efforts to pursue our domestic restraint
policies and an understanding response by our friends abroad to the
shape of the adjustment problem, we may feel confident of the ultimate
outcome.
But the challenges are real.
Recently I had the opportunity of hearing the very able former
Chairman of the President's Council of Economic Advisers--Ilr* Arthur
Okun--address himself to the problem of the achievement of high employment,
without price inflation, and gtf^ec.onomic groxtfth.
His own
tradeoff
in the search for economic;{growtH wh^Xe avoiding inflation and undue
¡'I .
1
W-. '
V-
/
. :/
l i& h a r y
unemployment was to compromise on a lower than desired, and potentially
possible, annual rate of economic growth, and a somewhat highet than
desired annual rate of price increase.
Unfortunately this sort of
compromise may not be good enough for our economy, either in our own
interest or the world's interest.
From my own standpoint, I do not think
we can look forward to sustainable economic growth in the United States
in the 1970,s unless we are successful in dealing with the problems of
inflation and inflationary expectations*
An acceptance of Mcreeping
inflation,f--e.g. a 3% "crawl"--would, it seems to me, be self-defeating.
As President Nixon put it in his address to the nation a month ago "the
only thing we have to fear is fatalism1' as to rising prices.
I do, however, agree with Mr. Okun on what he seemed to be saying
as to a key area for action in our search for a way to curb inflation
and promote sustainable growth with high employment.
Here I am referring
to the area of wages and prices--an area which is of concern in the
United States and an area whose importance has not been lost upon the
United Kingdom.
And that, in turn, raises the open question of an
effective approach to an incomes policy.
The way in which we in the
United States tried to use price and wage guidelines as substitutes for
monetary and fiscal measures, in the face of the inflationary environment
of the 60!s, unduly reflected discredit on the entire concept in our
country.
Maintaining appropriate overall stabilization policies is
still our single greatest need.
But assuming an improved, while
-
13
-
undoubtedly still inexact, fiscal policy and a somewhat better record
of performance on the monetary policy side, I think one should ask
whether we might not also be able to improve our record by demising some
form of incomes policy as a supplement to ovetall stabilization measures*
The question is relevant to the possible dilemma which we may face of
slower growth with rising unemployment, on the one side, and faster wage
increases and rising prices on the other,
I am hopeful that ways may
be found to restore some role to incomes policy within the framework of
overall stabilization measures.
This is not a recommendation for direct price and wage controls to
which I am completely opposed under present and foreseeable circumstances.
They tend at best to suppress manifestations of inflation and to mask
serious distortions that plague the economy long after controls are
removed.
Furthermore, they lead to economic inefficiencies and inequities
and have heavy associated costs, including a costly administrative
bureaucracy.
And finally, they are likely to lead to attempts by both
management and labor to flout the spirit--if not the letter--of
administered decisions.
The problems and choices with which U, S, policy-makers are confronted
under present circumstances are both obvious and difficult.
There are
risks of holding on to restraint too long, but there are also risks of
letting go too early.
wants inflation.
No one wants unemployment to rise; and no one
The cliche these days is the "tradeoff" policy-makers
-
are x^illing to accept*
1 1
-
Such a value judgment assumes we have matching,
reliable schedules of unemployment versus inflation--a state we are far
from reaching.
But my own value judgment is clear; the danger of
prematurely letting go--especially in the face of potential slippage on
the fiscal side--is much the greater danger.
Clearly, it will take some time to unravel the snarl of the pricecost spiral that has developed in recent years.
It will also take
determined and flexible monetary and fiscal policies, given the
insistent demands for all sorts of goods and services in the U. S.-an insistence that has not abated for more than relatively short intervals
in the post-war period.
While there is no spectre of a budget deficit
of the fiscal 1963 magnitude, I am concerned about the present outlook
in view of uncertainties on both the revenue and expenditure sides of
the budget.
On the revenue side the uncertainty regarding the surtax
extension, investment credit repeal, and impact of tax reform raises
the possibility of a sizeable deficit in this fiscal year, and even
more so if expenditures were to exceed budget estimates.
Looking further
ahead, the phasing out of the surcharge together with prospects for
sizeable expenditure increases, makes some increased fiscal stimulus
nearly inevitable.
Possible slippage on the fiscal side may make it
even taore necessary to hold steady on the monetary policy side in the near
term and threatens to place too much of the burden on monetary policy in
the longer run.
- 12 -
But this is not to say that monetary policy will not ease when
easing is called for by the economic situation and the mix of
stabilization policies.
magnitude of action.
The trick will be in the timing and the
One of the lessons of the past is that we are
likely to make mistakes; but another lesson is that we do survive and
grow.
As Herbert Stein, a member of the Council of Economic Advisers,
said recently:
f,The economy is not poised on the razor's edge, ready to
plunge into disaster at the slightest error*
If this were so, we
would not still be here."
To sum up what I have been saying about the prospective timing
and dimensions of the transition period, the first point I would like
to emphasize is that while growth in demands and real output seems to
have slowed, and further slowing is generally agreed to be in prospect,
policies should not shift to abrupt and massive easing at the first
signs of rougher going and, in fact, at the moment we must try even
harder to maintain an appropriate fiscal policy.
The second point of
emphasis is that getting the rate of price increase down to tolerable,
acceptable limits will take time.
I doubt that we can achieve this
by the end of next year but, hopefully, we shall make appreciable
progress and achieve our goal of price stability sometime soon
thereafter.
If we are successful in getting the U. S. economy on the track of
stable, noninflationary growth in a couple of years, what then for the
remainder of the decade?
t
13
-
First, I am confident that demands--private and public--will be
strong enough to place an effective claim on our potential real growth.
Though growth will be irregular there should be no reason for our
economy to become stagnant at any time during the 1970*s.
Second,
many issues revolve around how the benefits of future growth will be
shared--both within the private sector and between the private and
public sectors.
The general expectation in the United States--and one
which I share-~is that demands for public spending and investment will
be urgent.
Public spending has come to be viewed as an appropriate
instrument--within a free market society--of meeting legitimate social
needs that cannot adequately be met by individuals acting as such.
In
principle, the role of government has always been viewed in this way.
The difference in the U. S. today is thct our most urgent problems are
of the sort requiring action by the public sector and this has greatly
widened the scope that many are willing to ascribe to government.
Government today is viewed as capable of improving the quality of
life and bringing about a more equitable distribution of incomes rather
than, as in earlier times, being viewed simply as the main instrument
of economic stabilization.
I shall not enumerate at length the various
specific programs to which the several levels of government are
committed or may be committed in the years ahead.
They range from
defense to urban renewal, roads, education, minimum income maintenance
or welfare, old age insurance, medical care,
and water--and <what not?
preventing poLlution of air
And, significantly, some major programs are of
-
14
-
fairly recent origin, and are likely to expand even more.
Thus I
have no doubt that government expenditures will increase substantially
over the next decade.
But this simply reinforces the several bases for expecting strong
demands for private fixed capital as well.
An economy with vigorous
demands in other sectors will inevitably stimulate demands for
expansion of capacity and modernization of existing equipment.
Technological advance and pressures for minimizing labor costs will
provide additional incentives*
To these classical underpinnings of
business fixed investment we must add the widely recognized urgent
needs for housing in the United States, both new housing and
rehabilitation of existing substandard facilities.
(For such a
relatively young country, we seem to have developed an inordinate
number of slums in our central cities.)
The heavy demands for business fixed capital and for housing,
along with related capital requirements, when taken all together
suggest sustained pressure in the decade ahead on the money and capital
markets.
If the Federal government at best shows only a more or less
balanced fiscal position over the decade, the corollary will be a
continuation of high interest rates in the United States*
I need not,
and cannot, specify how these rates will compare with recent interest
rates but, if my assumptions are realized, rates will remain generally
high.
Thus an important point both of conjuncture and parallel between
-
15
-
the U. S. domestic and the international monetary scenes is in the
prospective levels of interest rates worldwide and the implications
for growth and development throughout the free world.
As I peer into
the 1979fs, I foresee a world in which capital demands far outstrip
supplies.
And with no diminution of basic demands, I see little
likelihood of interest rates declining to earlier relatively low
levels.
In the United States, for example, credit demands in the
wings at the moment may deter or cushion downward rate movements when
and if an easing of the monetary brake becomes appropriate.
And as
has been evident in 1968 and 1969 U. S* rate levels are not irrelevant
to rates elsewhere as the international money market has grown in
size and increased in fluidity.
-
16
-
As I turn, then, to begin looking outward at the international
monetary scene does this mean that I foresee a repetition of the strains
of the 1960's?
The answer is !;no.!i As I look ahead to the international
monetary scene in the 1970’s, I think the
that we will be in
reasonable expectation
is
calmer waters --the phrase used by many of the world's
leading financial officials at the annual meetings of the International
Monetary Fund and World Bank a little over a month ago.
three key elements:
My hopes include
First, a general worldwide stability of price levels--
relatively speaking, in comparison especially with the last few years-coupled with steady economic growth; second, a much greater degree of
balance of payments equilibration than we have seen of late; and third,
further development of an international monetary system in which gold,
SDPv’s, and dollars will all play important roles, with a steadily in
creasing quantitative place for SDR1s.
It is mainly on the third of these elements that I want to develop
some thoughts tonight.
I hardly need to justify nutting hopes for stable
growth and payments equilibrium at the head of my list.
Without them
there would be little point in trying to think about an ideal inter
national monetary system; we should all be occupied in putting out brush
fires--or controlling real conflagrations.
But I find several encouraging
bases for an optimistic vista on the international scene.
First of all, by the year 1973 we will have created, and be using,
almost $10 billion of special drawing rights, the new reserve asset
-
17
-
that represents the successful culmination of our prolonged quest for
an international money to supplement gold and dollars.
This creation
of SDR's, in an amount approximating one-fourth of the world1s monetary
authorities’ present gold holdings, means that the desired growth of
world reserves can and will be accommodated in ways supportive of, rather
than inimical to, the adjustment process.
Some two and one-half years
ago, my good friend Jeremy Horse, Director of the Bank of England, spoke
to this same groun on the need for, the possible nature of, and the out
look for, the creation of a new reserve asset— this was in March, 1967
even before the SDR per se had been devised— and guessed that na new
reserve asset will be added to international liquidity, though when,
in what form, through what agency and under the pressure of what events,
may yet be uncertain."
I can only hope that two and one-half years hence
my guessing will prove to have been as accurate as hisi
As I look back over the long history of our efforts to bring into
being this new reserve asset, a number of the high spots in that search
occurred here in London, at Lancaster House.
But of them all, one of
the most dramatic, in my memory of events, was when a seemingly major
impasse, presaging a breakdown of our discussions and negotiations, was
resolved when Chancellor Callaghan, then chairing the meeting of the
Ministers and Governors of the Group of Ten in London, said simply,
‘‘Gentlemen, we have to reach an agreement if we have to stay here all
night, and I, for one, have a very broad bottoml"
At that point, with
-
18
-
the tension broken, the meeting was suspended temporarily and, following
consultations, the stumbling block was removed.
(If I recall correctly
the solution was the reconstitution formula in the use of the asset.)
But, to return more to substance, SDR's do represent a milestone
in the evolution of the international monetary system and can only serve
to strengthen its functioning in the 1970's.
Frequently,
question as to how the SDR's may be used in practice.
I am asked the
Some knowledgeable
observers believe that they will sink to the bottom of the pile of
reserve assets alongside of gold and be used rarely.
not believe that this will be the case.
For my part, I do
I think that the SDR's will be
used in a variety of ways, many of which will only develop as countries
have the asset in hand to use.
They will surely be used differently by
various countries.
As to use by the United States, undoubtedly transfers of SDR's from
the United States to other countries will be used alongside, and inter
changeably with, gold sales and IMF claims to meet specific needs as
they arise.
Basically, over the years we will want to add to reserves
from time to time, just as other countries have* and indeed SDR's provide
our only hope for building up our basic reserves.
We are starting from
a position in which other countries' reserve claims on the United States
have decreased over the past two years.
As compared with the position
-
19
-
at the middle of 1967, when total liquid and near-liquid U. S. liabilities
to foreign official holders were $17.3 billion, the amount at the end
of June 1969 had been reduced by $1.3 billion, to $16.0 billion.
from the end of 1967, the decrease amounted to $3.3 billion.
Starting
However,
in the last few months these liabilities have been increasing again.
Apart from the use the United States will make of SDR's, the extent
to which other countries will use them is not clearly foreseeable.
Ho
doubt some will prefer to economize on their dollar balances, using
dollars to meet their deficits and taking SDR's in times of surplus to
the full extent the new rules may permit them or require them to do so.
Others, in all likelihood, will value the higher interest return on
dollar assets above the gold-value guaranty on SDR's, use the latter to
meet their deficits, and take in dollars when they can.
In the long
run the ideal to be hoped for--in my view--is that considerations of
these kinds will lose their importance.
(Perhaps that will mean some
day increasing the rate of interest on SDR's above any rate hitherto
contemplated.)
As the volume of SDR's grows over the years, all reserve
assets may come more and more to be viewed as equals in the central bank
till.
There would then no longer be a role for the working o£ Gresham's
law as a determinant of the form in which national reserves will be kept.
Under this regime the old riddle of what is the difference between
a dollar-exchange standard and gold-exchange standard would lose all
- 2D -
its ooint.
No one would be able to say whether the SDR is based on
gold and the dollar or the dollar on the SDR. and gold.
Diehards in some countries might still complain, if they liked,
of the loss of economic independence entailed in the adherence of their
countries to this SDR-and-dollar system (with gold a diminishing pro
portion) but the words would be hollow.
There would be nothing to
prevent any country-other than the United States--from changing its
currency parity whenever that became necessary and, let us hope, by
then there could even be positive incentives under international arrange
ments for a country to do so when an up-valuation of its currency is
what it, along with the rest of the world, needed.
out aside from the question of the relative use, or ultimate use,
of the SDR asset, it will be, as I see it, used in the near term just as
other assets are used in meeting reserve needs connected with the
functioning of the adjustment process.
Host importantly, the mere
existence of the SDR’s makes possible the smoother working of that
process--and this is what I look forward to in the 197C’s.
Clearly,
SDR's do not insure or guarantee that the international monetary system
still will not be subject to stresses and strains, and to major dis
turbances from time to time, but they do provide a means, founded in
international cooperation, to reconcile the reserve needs and objectives
of both the surplus and deficit countries, without resort to disruptive
policies.
For on this score surplus countries have their parts to play, too.
-
2 1
-
Arid perhaps this is the point at which to remind ourselves that the
inward essence of the whole idea of creating reserves by international
fiat is to ensure that a world shortage of reserves will not hamper the
adjustment process, that fears of suffering a decline in national
reserves--now to include freshly allocated SDR's--will no longer cause
countries with surpluses to follow policies that frustrate the attempts
of others to stop having deficits.
Another related and supplemental, but significant, source of strength
as we look forward to the 1970's is in the expanded credit facilities,
which have proved so tremendously helpful in meeting growing credit needs
including those arising from short-term speculative and other money flows.
In the 1960's, the general overall increase in IMF quotas, plus selective
increases, brought Fund resources to around $21 billion.
A further
general increase in quotas, along with selective increases, is in process
and prospect so that the size of the International Monetary Fund, in terms
of the total of member-country quotas, may grow by about a third, to
around $28 billion--and another quinquennial quota review will be due in
mid-decade.
Along with all of this perhaps you will forgive me for speak
ing with parochial pride about the further development of the Federal
Reserve swap network--the network of mutually reinforcing credit lines—
now totaling nearly $11 billion.
In terms of its demonstrable usefulness,
since the network's inception in 1952 the volume of swap transactions in
both directions has amounted to about $20 billion— an impressive record!
So, indeed, the credit facilities have been, and are being, expanded
in a way that provides a basis for coping with the expanded credit
needs associated with the substantial enlargement of the world economy
that we may confidently expect in the 1970's, and the larger needs
associated with the continuance and expansion of a convertible currency
world.
This brings me to another source of optimism about the near-term
future.
As we look into the 1970's comfort can be found in the relatively
recent realignment of exchange rates of major currencies and, especially,
the 9.3% revaluation of the D mark which, as an undervalued currency, was
a major destabilizing factor whenever and wherever pressures arose in the
system itself.
I think these moves were appropriate and will contribute
to stability in the period ahead.
One of the lessons, however, of the
1960's is that it is essential, also, and this is no contradiction, to
remove or lessen undesirable rigidities in the international exchange
rate system, that is, to provide in some way for changes in established
parities, when they become necessary, without long delays.
And here
I feel quite certain that we will move forward on those lines, not simply
by force of necessity but, again, as the result of international study
and cooperation.
I do not intend tonight to be more specific in forecasting the nature
or timing of the added, though still necessarily limited, exchange rate
flexibility that one can envision in the 1970's, but I do sense that it
-
will and must come.
23
-
There are almost overwhelming difficulties and
problems connected with building into the system a somewhat more responsive
adaptability of exchange rates to underlying changes in the relative
economic positions of nations.
Some of these problems are transitional,
others longer run such as in capital movements and the implications for
domestic policy independence.
If any variant is to prove practical, a way
must be found to get around these difficulties and enable the system to
adapt more flexibly--without, at the same time, bringing a significantly
greater degree of uncertainty into international transactions, and pro
voking more, rather than less, speculation in the exchange markets.
And,
as Secretary of the Treasury Kennedy emphasized in his remarks at the
Bank-Fund meetings, all of this must also be accomplished in a way that
will not provoke a bias toward devaluations--a bias that has been far
too prevalent in the decade behind us.
But, looking ahead, I believe we will be grappling, and successfully,
in the 1970's with the problem— or, more accurately, the necessity--of
introducing somewhat less rigidity into a system consisting essentially
of relatively fixed exchange rates.
While this is a large undertaking,
I believe we will once again see a solution emerge from the continuance
of the remarkable international financial consultation and cooperation
developed during the I960*s.
Another far from insignificant source of strength in the system in
the 1970's can, I believe, be found much closer to home for my audience
-
24
-
tonight in the basic improvement in the United Kingdom's situation,
both domestically and externally.
It indeed must be a source of real
satisfaction to all of you, a satisfaction which we share vicariously
at least, that the United Kingdom has once again joined the ranks of
the surplus countries!
Last, but not least, in my catalogue of supports to the international
monetary system in the 1970's is the durability of the two-tier gold
system, dating from March 1968.
Since then there has been much con
fusing and inaccurate talk about the demonetization of gold in the inter
national monetary system.
Just a month or so ago, I heard Professor
Lamfalussy deliver the Per Jacobsson lecture on the role of gold, looking
forward to the time when it will be displaced in the international monetary
system.
For my part, I do not interpret the two-tier system, itself, as
representing the demonetization of gold.
Rather I think it has served
to insulate the monetary system from fluctuations in the supply and demand
for gold and has thus contributed to greater stability.
Reassuringly,
a way has been provided for a deliberately and judiciously created asset,
the SDR, to meet the major part of the growth needs for reserves, while
keeping a place for gold as long as any country wants to use it as a part
of its own reserves.
As I look down the road ahead, I would simply
expect gold to play a relatively diminished role in the international
monetary system, while SDR's become the main growth element in total
reserves.
•»
25
*
In all of these circumstances, we can expect a final liquidation
of suspicions that the United States might change the official dollkr
price of gold.
In an SDR wotId a gold price change would represent even
more oi an anachronism than it would have in the years leading up to
the SDR1s.
The decision having been reached to provide, henceforth,
for the deliberate and equitable creation of reserves as needed--to
meet growth requirements without provoking inflationary pressures and
to implement a smoother working process of balance of payments adjustment
among nations--a gold price change is indeed unrealistic.
Thus even if
the market price of gold should rise, I think we can reasonably count
on the continuing successful operation of the two-tier system.
An alternative tactic for the United States is sometimes urged:
to
let surplus countries take care of themselves and simply let them worry
each other about the value of the dollars they accumulate in their
reserves--and the amounts of those dollars which they hold.
such ideas wrong-headed and mischievous.
I consider
Too much is at stake for the
United States and the rest of the world in the future development of the
SDR system in particular--both as a bulwark and as a consequence of inter
national financial cooperation--and in harmonious economic relations in
general, for us to risk the destruction of the new edifice by some devilmay-care attitudes on the part of the United States.
Too much depends
on cooperative action by and among surplus countries for us in this country
to walk away from the responsibility for the supply of our own dollars
-
in foreign hands.
26
-
To justify that cooperation, and to foster and pre
serve the life of the system, it is essential to maintain the value
of the dollar.
This then brings me full circle in my remarks this evening.
I began
by stressing the close ties between financial developments in the United
States and the rest of the world.
I should reemphasize that the hopes
I have been describing are for the future.
If there is to be an SDR
future the international monetary system must get through the first two
or three years of SDR creation in creditable fashion.
To make that
possible, the United States has a big hump to get over on the other side
of the valley, as well as a tortuous path through the valley.
But much
of what I see ahead seems to lead one to be reasonably optimistic.
Last
summer, Lord Cromer, in discussing the British banking system, said that
"metaphorically speaking, it may be a plumber's paradise [in terms of
money flows] or an economist's Elysium, but for a banker, it is Bedlam."
For my part, I do not see bedlam ahead in the 1970's but, assuming the
continuance of the unprecedented international financial cooperation of
the 1960's, an exhilarating decade in which perplexing problems are met
by constructive change.
@FedFRASER