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BANQUET ADDRESS
by
Honorable Sherman J. Maisel
Member, Board of Governors
of the Federal Reserve System
.
Before the
University of Miami Savings Institutions
Diplomat Hotel and Country Club
Hollywood-by-the-Sea, Florida
March 11, 1968
fiy h o i * ? 0 \ r ! e r y
^
distr?^e
ho
1 ^t wh??
Ji
^ S o an w
. We
m U C h
f
?r
the
kind
introduction, Monroe.
I should
, which is the sixth Federal
M o n r o e
Kimbrel has just been President
v e r y for>
tunate to have him here.
It is
M
feel
Forum
hiS
d i s t r i c t
Settee
£ ® ? ? i n g ° C ? a S i 0 n ; P e ° p l e a l w a y S a s k a b o u t t h e ° P e n Market
CoiLi^
' 11 ° f . M a r ? h X > M o n r o e became a member of the Open
^ U n a t T \ t e e ' t]?at 1 5 ' f o r a V e a r
so. We think we are very
V e
u
representing
us
here
and we feel you are very
h a v e h i m runnin
L
g the Federal Reserve Bank of the Sixth
I reserve district here.
o n e ^ 6 a l w a y s b e e n t o l d a s a n after-dinner speaker one should
oLCh you a n
K e K ^ s h o r t ; : s o r t of like that famous Trappist monk,
t
r
babl
£ 5 hat til P °
y recall.
He went into the monastery and was
t 0 0 k hlS V O W S of s i l e n c e
h W° w o J r
that he would be limited
So he
V®
^ aJear'
stayed, the first year and at the end of
WO^H A b b ? t t : c ™ e
to see how things were and he used
bed hard
So the A b b o t t
said
n d V > fiv n s a r ? g '
'"
> " ^ 1 1 , that's
haci
SaW t h a t they had some m o r e s t r a w
nd
it
for" his slab,
ttS' i-, ? e d U p ' a n d t h e s e c o n d V e a r > the Abbott came around
h
0 8
° w a r e things this year?"
And he used his two
h a ^ t h i n ^ ' , food bad.
So the Abbott said, "Well, 'we can probably
C they 2? ^ o u t that."
So he went and talked to ^he cook and saw
a l l t t l e be
ha*fhi*d x,
t t e r food and everything.
And finally
s
r W a s
assed
and
UU
th* ?
P
>
the Abbott came around and said, "Well,
ho,V' A n n S ^ r y n ° W ? " A n d t h e M o n k t u r n e d t o
and said, "I
l0
ked at h i m a n d said
Well
Vou hJahvee n
°
>
"
> vou certainly
^Qiu
t d ° n e anything but complain ever since you've
ho
^
this 1 f i ? d it: i s g o i n S to be much easier to keep my words
Su
^
P p o L ^ V ! n i n g , b e c a u s e 1 w a s i n a Peculiar situation.
Joe McMurrav
i n s t i l ! : t o t a l k tomorrow, but because John H o m e couldn't get
W
tomorrow, Joe talked today and it turned out that our
ng e X a C t l y
s i m i l a r
8
lines.
I looked at the topic for tol e t " S a v i n g s I n s t i t u t i o n s — a Forward Look."
And I said,
vj fouL ^
forward to 1985."
Well, he looked forward to 1990
im
J
Vl
V?
P r e s s e d with the same sort of numbers,
to ? v V
tl
l a r g G n u m b e r s a n d then at the same time
a b o u t
b e
fact
W > f i e d Ztlt
^
> 1 think, that we are all somewhat
1
U P a f f l u e n c e ar d
u*
5 ?
> somewhat worried about the problems
Wha
V
** a
nf V a ? ' W ? r a n a l o n g t h e s a m e l i n e t I am going
h
S U l t
f t h a t is n o t
ive a11 the
M ? Us*lf
^
°
S
numbers.
I
cut
1
f m
t
°
y speech out.
You say, "Well, Joe handed have
his out.
You
s t l c k
Th
? r e W e a r e n , t i n t h a t m u c h d isagreement,
with the other two parts I had and one is to show
w
hy we feel so certain of this problem--why we both could look this
far ahead and end up with all these trillions of dollars, and the
reason is that we know that even looking this far ahead, we have already built in most of our labor force, we have a good knowledge of
w
hat i s going to happen to technology, and we also have the fact of
Compound growth.
In thinking about the future I am always amazed,
^ p r e s s e d , and sometimes horrified by the impact on our society of
current events and trends that are hurtling forward at a compound
rate. Compound interest, a Rothschild once said, is the eighth wonder
of
the world.
Now, for the fifth world, compound interest has always
keen a wonder.
The fact that you can pay compound interest remains
a
major part of your industry.
We were talking about this at l u n c h —
Under the Board of Governors' regulations you can compound instantaneously, which means that you can compound your interest infinitely.
Now, don't think this does you any great difference.
I forget
hat the thing is, but I think it is 3 basis points a year if you comP°und instantaneously as opposed over daily.
But we figured we weren't
Soing to get into this argument.
Every time we passed a new regulation,
people came in with a different type of compounding so we just decided
that if we allowed you to do it at an infinite rate, that that would
easy, we wouldn't have to argue about anything else, whether it was
ie
gal or not.
Bit it is, as I say, the important thing really is com- I
Ending.
A wise man once said that the fact that no one knows anyabout the future makes the business forecaster more confident,
ctualiy, however, this is not the truth, because we do know some
t
^ings about the future with reasonable confidence.
These have important implications for the thrift institutions.
The size of our
*<?uit population in 1985 , for example, has already been largely determined by past events, namely, births.
Barring unforseen natural disasters, major wars, or radical changes in death rates or immigration^
•Uws, the number of people who will be in the labor force, in 1985, is
^ r e a d y quite well known.
There will be about 34 million more people
^°rking then than now, and this growth will be about twice what we
^ V e experienced in the last 18 years.
In addition to knowing the
Potential size of our labor force, we also have a fairly clear picture
0f
potential output.
Improvements in productivity have stayed within
**ther narrow limits in periods of full employment.
When we add
Productivity changes to a growing labor force, we can be fairly certain
Of
a growth rate of 4 per cent a year for the economy's real output.
J* has acutally been well above this for the past five or six years.
this is where the miracle of compounding comes in.
Four per cent
j*°esn't sound very large, but it means that by 19 8 5 our economy will
.e producing more than twice as many real goods and services as it
Is now
The total gross national product will grow in today's dollars
to
nearly 1.6 trillion dollars.
More amazing, probably, is the fact
^ a t the increase in output in the next 18 years will be larger than
^ e total growth in the output in the last 400 years, since the first
Settlement here in Florida.
So in the next 18 years, our ability
produce goods and services will grow more than it has in the last
^00 years.
Now, it is this fact that we know fairly well and it is
f^sed upon the fact that we can get the estimates of the amount of
h
°Using that the industry will have to build, the potential size, the
^ o u n t of savings that there will be in the economy, and in those ^ period:
J-t is all based upon this basic concept of compounding.
Now, it is
b
ased on this, then, that Joe and I arrived, as I say, at relatively
same figures, but let me disagree with some of the things he said, j
w
h o t e x a m P l e ' h a v e n e v e r gone along with the idea that 3 mil*v e a f a y e a r N o r t h e t w o million and 6, or something like that
h o u s e h o l d ^ t h a t t h e r e 1 S double counting.
When you look at
hou
SebuilH,- d n d P ° P V l a t i o n s i z e ' Y ° u i^st don't see this amount of
Plac
g rec
ement
^ u l r e d ' V o u s t i 1 1 add on a tremendous amount for reand
1 h
a v e never been able to get up to the n u m b e r s that
( oth ers
Were
a n d a 1 1 1 Can
s a y
is t h a t
18
years ago, when people
il h
the
the S a m e
S O r t o f f i
ficui
S u r e s 1 didn't believe it then,
d l d n , t
a d d U
in the
cas
t
P
interim, and I am afraid that in
Cert
*in * * d l s a g r e e .
Secondly, both Mr. Vogt and Mr. McMurray made
here ^ l m a t 6 S ° f t h e P r o b l e m o f s a v i n g s — o f getting the savings —
need
p r o
for
l e c t trends and things like that, and project the
tru
Ca ltal o f t h e a m o u n
M
cturp 2
t of housing we will need, the infrat W ?
° U r c o m m u n i t y , and so on, you can get into problems of
th
ge
* savin
enough?"
" w i H we have the savings?"
"Where are
0JIle
g
lng to c o m e
from?
l
frorn?M °
"
"Where are the m o r t g a g e s going to
a n d SO on
, t 15 v
' a n d t h i s i s a g a i n a familiar thing over "the
lot
one l ? a r s o r s o > these sorts of w o r r i e s .
A n d , frankly, it is
^e
. 1 h a v e e v e r w o ^ i e d a b o u t , because when you look actually
f°Unt a v i n S s P i c t u r e , you find, I think, that the question of the
. t h * g m / ° V e r n m e n t savings or d i s - s a v i n g , in other w o r d s , the size
r
i^helm
™ e n t d e f i c i t o r the size of the government surplus, simply
b
f° lems n
. n o r m a l c h a n g e s in the saving patterns and the saving
u
f° Worr:i
intermediate periods.
So someone has asked m e , "Aren't
n
a b o u t w h a t
1972 o
is going to happen to the m o r t g a g e market
1975, o r anything?" I say, "I worry only about that if I
tQ
e
Siven?i! m e t h a t W e w o n , t m a k e t h e Proper political decisions,
S 1 Z e
abates
° f t h e e c o n o m y , t h e way in which our tax system
in
p o t e n t i a
d
S th
l s a v i n g s , you have to assume, that we will always be
i e C i s i o n o \ W r ° n g d e c i s i o n s and that these aren't really very hard
h a v e
a? W i t h r p
w h a t e v e r the rough balance of the private economy
St
pect to
ion
^
savings and need brought back into balance by the
+ w h e t h e r t h e government runs a deficit or surplus and
thG
t o t a l
t h a t d
u T h
e f i c i t or surplus,doesn't have to be very
t h i r d
•i
o
disagreement I would h a v e , as I say, I have taken
a r e a s o f
i
agreement because he can do that, is on the quess
com
>u^ °nal
P O s i t i o n of the Federal Reserve Board and this is not
>f 1 t h i n v m a t t e r t h a t 1 f e e 1 ' t h a t the suggestion was not very good,
th
? r e r e a l l y are other reasons.
The problem of coordination
ls a
p r o b l e m , but I don't think it is a very difficult
h a s b e e n
lOh U s e ' 0 f
r a t h e r great in the last couple of years, primarily
p
titiv * r r s o n a l i t y p r o b l e m s , there are also some o t h e r problems,
e deba
s e m e n t of standards, when you have several regulatory
0
Competing in the same field there is always a problem of
cuT that
' t h a t g u y i s easier, t h e r e f o r e , we have to be easier
1
S
on? ^
° 0 n ' " B u t t h i s ' 1 t h i n k > i s a problem which can be
thinv
readily.
A n d , as I say, it is certainly one that I
S
of' '
requires that the Federal Reserve Board be expanded by
[0
The
. r regulatory agencies to handle.
reason, I t h i n k , is that what the Federal Reserve really
he s s 0 r p - y l s t o m a k e monetary policy.
N o w , if you go back in
le<
man
s
•f
^
?
'
h
i
s
t
o
r
y
,
and
you
follow
his r e a s o n i n g , most of
t
is m a d e wron
ftd^**
g ' i f n o t a v e r y good record from his point
S w o u l d n , t
f
si,
e e l quite as strongly that that is the case,
t h a t in t h e l a s t t h r e e
'«> * wha-h
years it has been e x c e l l e n t , no
the h i s t o r
^ Had h
y was before that, but it still is true that if
e e n
problems it was primarily because not enough emphasis
this
on it.
It is, I think, contrary to what some people may believe, a
fairly difficult and complex task and one that requires both a # g o o d
deal of work on it, and a good deal of time spent on it.
I think,
therefore, putting people who would look upon this as a once-a-month
job is not very good.
S e c o n d l y , the problem with that suggestion^is
that most of the people he suggested are really chaimants of credit.
And again, the history of having the Treasury on the Federal Reserve
Board',' which was true for its first 30 y e a r s , was that they were
far more interested in their function as claimants of credit than
they were in determining that we have a good monetary policy.
So
I think that the one important thing is that monetary policy has to
be carefully coordinated with a d m i n i s t r a t i v e policy.
We are independent
but obviously in a period or in an economy where fiscal policy,
wage-price p o l i c y , monetary policy and other p o l i c i e s , in this case,
war policies and other things such as t h a t , all interact very closely
upon each other.
It becomes very important that you have coordination
but I also think u n d e r our present system that the Federal Reserve
be able to take an independent view and also have the time to do this,
If vou ask the Secretary of the Treasury to worry about monetary
policy, he has got hundreds of other things to worry about and he
just couldn't give the time.
I think we have been rather fortunate
in this country in that w e , by being an independent board, m
most
cases we have been able to stand up to the Treasury for what are
more important things for the economy than simply the lowest price
of yields on the public debt or other things.
Secretaries of the^ #
Treasury in other countries and this country, I think tend to maximize
the wrong p r o b l e m .
They worry much more about their own personal deb,
problem or things of that sort'than they do about the country.
So
an independent board has the advantage of being able to think about
monetary policy first.
Then when it comes to a view of what it should
be or what the policy of the country should be m
a coordinated moneta
and fiscal w a y , it has the skills, we h o p e , to try to convince others.
And again, I think in the history of Washington we have been rather
fortunate.
The Federal Reserve .has, traditionally had one of the
finest staffs in W a s h i n g t o n .
This is because it has ^een a n indepen *
agency and there have just been m a n y , many areas where the w o r k can t
be done in an agency which has been on the firing line on a day-today b a s i s .
The Federal .Reserve, a fact that
frequently, has been able to give a good deal more staff time, a good
deal more interest to it, and-I think has succeeded m
that way
W e l l , those, as I s a y - t h a t takes the place of my t n l l i o n s - - I h,
been able to substitute those comments for.
But let me |o back to th.
la<st fact that I wanted to talk about, and that is that m
contrast
to the basic p h y s i c a l factors which lie largely beyond the reach of
public p o l i c i e s , we can look forward to exerting some influence dunn
the next 18 years on the quality and • ^ a m e n i t i e s of - b a n living
And I think this is obviously something that bothers all of us now i
feeling that as we become more affluent we h a v e n ' t — a r e n ' t that much
better off in our living conditions.
We will need to take steps to
improve the variety of Creative o p p o r t u n i t i e s and the environment in
w h i c h we live.
For, as one critic reminds us, the danger of an affluent society is that people can be better off without bexng better.
Sheer growth in n u m b e r s will not be enough.
And h e r e , too
the tnri
industry has important contributions to make.
It is a basic source
the funds we w i l l need to improve o u r urban intra-structure and our
housing
And unless we do t h i s , our full potential for growth, both
-5Js a n . .
l o n anci a s
Uci
individuals will be w a s t e d .
"Honesty," a polia n or
iess
>ce said/'is no substitute for e x p e r i e n c e . "
But I would be
to g
honest today if I failed to point some problems in addition
°PP°rtunities that experience suggests lie ahead of the thrift
«ul»try.
First, while we face a period of accelerated expansion and
be
Population, h o u s e h o l d s , and h o u s i n g , nearly all this growth will
a
t i ° n C e n t r a t e c i in our cities and surburbs.
Secondly, while we face
vj.c ' e
unprecedented expansion in our production of goods and serof t 5 here too, most growth will occur in urban areas.
The combination
logical g r o w t h , rising standards of living, and increasing
on t h l 2 a ^ o n '
t u r n , threatens to pose an unprecedented burden
goVe e quality of our living e n v i r o n m e n t .
To paraphrase a recent
^ o t h n m e n t r e P o r t o n "the subject, one person's trash basket will become
a*>0u
man's living space to an increasing degree.
We can all see
Us w
h a t pollution has already done to our skies, our streets,
our rivers.
ag0 \ must say, I had a very shocking experience about two months
w e r e
^Cat*
visiting our d a u g h t e r in California at Thanksgiving
n
re Su -^° _and about the first day we were there it rained.
And as 3
ra
^- n »
3 u s t cleared the air b e a u t i f u l l y , and she
U
anc
s
they
P
* ^ e said, "Gosh, look at the gorgeous m o u n t a i n s . "
And
ab 0ut . W ^ re really b e a u t i f u l .
The southern C a l i f o r n i a m o u n t a i n s are
°r
miles away from her school.
She had been there as a
an
aw^y
about 10 w e e k s , and had never seen the mountains eight miles
is t-v Well, when we went to southern California 18 years ago, which
^ne
Period we are talking about, there wouldn't have been more than
a
So
year when the environment would have blocked out the m o u n t a i n s .
e W e
* tr>er
have an example of a tremendous loss in our e n v i r o n m e n t —
"^ndous loss in our n a t i o n a l h e r i t a g e , and one of the questions
^ U V l ° u s l y have to face is, "Where w i l l we be 18 years from now?"
v
ir\
continue to move along this same compound curve or will we
s o m e o f
^e
our environment?
Unless some sort of drastic measures
en
> p r o b l e m s of disposing of the solid, liquid, and gaseous
an
ever h i g h e r - p r o d u c i n g , h i g h e r - c o n s u m i n g , more urbanized
e
»a s t e society, w i l l multiply at a compound rate.
These problems of
s
P ° s a l will be accentuated by the fact that while our production
to
seems to a c c e l e r a t e , the capacity of o u r air, soil, and waters
such wasted w i l l remain essentially constant.
Here is a
^ e c t o f compounding urgency in which the thrift institution has a
c
ity
stake, w h e r e undue pollution can impair not only the quality of
^ 0 ^ V l r o n m e n t s > b u t a l s o the value of indidividual houses, a p a r t m e n t s ,
<j r r e a l estate, that serve as loan collateral.
Let me say two
^ e n r t m a t : i c examples of what has been happening to the pollution of
• h * o U { ^ i r o n m e n t as a result generally of growing industrialization
"the w o r l d .
One of these problems comes from the interleaded gasoline as automobile fuel.
Based on ice excas
in G r e e n l a n d , scientists have recently discovered that from
a
1940, the lead content of air trapped in successive
# bout
to
ab
"*-ce rose from about 10 millionths of a gram per ton of ice
ut 70
• In other w o r d s , o v e r a period of almost 200 years it
jjhe a VP from 10 to 70.
From 1940 to 1950 , h o w e v e r , the lead content of
"^thift t r a P P e d rose to 2 00 millionths of a gram per ton, o r by 13 0.
a ten-year p e r i o d , in other w o r d s , the amount of poisonous
l9Q a n c e in the air had grown by as much as it had in the previous
W e l l , if you are all familiar with what a compound growth
looks like, you can put these points on the curve and see what
Problem arises.
I was recently told a h o r r o r tale to bring this
Point out more c o m p l e t e l y .
Imagine that an environment is created in the Great Lakes that
enables amoebas to procreate and double every 20 m i n u t e s .
To those
of
you as Harlan Swift and I and others here who were brought up
° n the Great Lakes, this is not too hard to imagine.
It is hardly
apocryphical story if you've tried to fish ...or swim in the lakes
ln
recent years--you recognize frow this type of e n v i r o n m e n t . i s growing
Ver
Y rapidly.
A n y w a y , it has been estimated that if amoebas procreated
this rate, in 500 y e a r s , the entire Great Lakes would be filled
s
° U d . W e could walk from one shore to another.
But the interesting
^ U e stion--if this h a p p e n e d , at what point would the Great Lakes be
° n Iy half filled?
Well, for those of you who are m a t h e m a t i c i a n s , the
answer is simple.
It would be half filled only twenty minutes_before
i* became solid.
But beyond that, it has been estimated that if
r hours before it became solid, you took a glass and dipped the glass
^ the lake and held the glass in the light, you wouldn't see that
x
^ere were any amoebas in it at all.
In other w o r d s , the power of
i m p o u n d i n g is such that it would take 499 y e a r s , 11 m o n t h s , and 29^
° a ys moving along a hardly noticeable curve and suddenly the worsening
eriv
ironment would become disastrous.
Where do we sound on such a compound curve today with respect to the environment around us?
Well,
ie
? arly, meetings such as this are extremely valuable to allow us to
day-to-day routine and take a longer, forward
a w a y
f r o m o u r
We can see some of the future implications of compound interest
the thrift industry.
U n p r e c e d e n t e d growth in o u t p u t , unprecedenh d growth in adult population and in h o u s i n g , tremendous needs for
!j°using, tremendous needs for pollution control, for other ways of con^ ° U i n g our e n v i r o n m e n t , a r e called for. These are all based upon
^ g h e r savings, larger loans, a much greater and more expanded indusA g a i n , I won't estimate the Savings pool because you have got
story already.
But I think it is clear that it will take imaginative efforts by the individual thrift institution to tap fully these
accumulations of future savings and to allocate them most efficientThe thrift industry itself will have to look forward to grappling
^ t h n e w a n d tougher p r o b l e m s as well as with some old standbys like
relation.
As a n a t i o n , we w i l l all be concerned about making the
^°st of our limited resources w h i l e sustaining a high quality of
g n o m i c growth.
The w o n d e r of c o m p o u n d i n g has already created part
the irreplacable fabric of the future o v e r which we can have no
^trol.
But s u b s t a n t i a l parts of that fabric have yet to be w o v e n
J? whatever designs w e may d e s i g n a t e .
To quote a famous French
f Plomat, "Remember this also and be well persuaded of its truth.
The
Ut
U r e is not in the hands of fate, but is held by mankind."
Thank you.
Sherman J. Maisel
Question and Answer
a
y»
Session
on: We heard Dr. Friedman's estimate of the chance of devaluation
Could we hear yours?
^^)orJ<aisel:
Well, obviously, I can't put a probability function
obv- s>
J c a n s a y something about the problem of gold, because
it is on all of our minds.
And first, I should make clear
t lis i s n o t a n a r e a i n w h i c h t h e
Coin *
Federal Reserve makes policy.
The Federal Reserve is asked
0r J Policy is made by the President.
ec
also
Wor T }Uested to administer certain programs and problems, and we
gett-in conjunction, just as J. Pierpont Morgan worked in terms of
enie^ 2 a l i n e o f c r e d i t from foreign banks that can be used for
^ & e ncy threats of speculators as a run.
I forget what they are.
between 3 billion and 4 billion--our current line with other
banks.
This is an additional — i t is actually a first defense
it:
whi
is used, before the international monetary fund drawings,
are a l s o
potentially large and for gold.
But I think what I
Say in t h a t
th
^ r o ^ e r , o o r rriednmn gave a very good basic outline
,o u l * Problem and I think the point that he was trying, the one I
P^niv t:ry
to stress again, is that there are really two very different
of
here.
One is the gold problem, and the second is the balance
t^ y m e n "ts problem.
And people confuse them and think of them as
s
^me, but they are really only rather dimly related.
G
°ld is the problem that has existed for only the last hundred
guess, and since he is the historian, I would ask him to
^
it.
But I think it is only about 100 years that we have had
Tist,ctUal gold standard in the world, and have used gold as a basic
St ^
of settling monetary claims.
And, as you all know, the gold
has been developing at a very rapid rate.
It is an entirely
t y p ^ e n t situation.
After World War I it became a very different
sta
n d a r d than it had been prior to World War I, and after
War%
II it again became an entirely different situation, and
^
it is still very different.
We have been one of the few countries
World which have had a gold cover law, for example, most coungou s did away with this after the War.
Most countries don't allow
to t o circulate within the country, most countries don't allow you
<U4° in and get gold--all sorts of things like that.
It is a very
problem, but the point of gold then, is that it is one of
of settling international debt.
Actually, there have been
l l V three basic ways.
Irw Y ou have gold, you have the international monetary fund draw^q 5 ^nd you have had the so-called reserve c u r r e n c i e s — t h e dollar^
Vou s t erling.
And if you, for example, were in Montivideo or even if
i n P a r i s a n d wanted to buy something in Berlin, you would
find that you would have to pay for it in dollars.
In other
the settlement had to go through.
Most currencies of the world
exchangeable against each other.
They are exchangeable only
SQ
the major currencies and that really means primarily dollars.
have been these three ways of settling international debt.
%
^ow, as the amount of trade has grown very rapidly, it is like
k<ank balance, if you were spending more money, if you have got a
-2-
bigger p a y r o l l , and so on, you need more money in the bank simply _
for transaction p u r p o s e s .
W e l l , international trade has been growing,
therefore, there has been a b i g g e r demand for ways of settling those
accounts, a basic transaction r e q u i r e m e n t .
W e l l , for a long time in
most of the postwar p e r i o d , this was met by people a c c u m u l a t i n g
dollars, because the d o l l a r was thought of as a very stable currency.
J
t was the main currency in which transactions could be settled.
^ was sensible for people to hold deposits in New York
just like
You hold them in y o u r own bank to settle international transactions.
The problem was, t h o u g h , yery similar to what this country was before
the setting up of the Federal Reserve System.
And that is, that ir
you r e m e m b e r the original national banking system h e r e , New York was
the center of settlement for the countries.
All correspondent
balances w e r e held in New York.
And this meant a pyramiding .af Reserves on New York for the rest of the country.
Periodically the
feet of the country would try to g e t r e s e r v e s out of New 'York.
As
you all k n o w , running financial i n s t i t u t i o n s — i f too many people come
in, you just'don't hive the cash, so that w h e n people
into New Y o r k , the cash w a s n ' t there.
As a r e s u l t . New York used to
just
"Tnucrh
we can't pay y o u . "
They closed down for a period,
Refuged to J a y f and at ?he end of that time, everybody would remember
that if you're going to run financial i n s t i t u t i o n s , you have to trust
them, so that New Y^rk would be back in business and £ was the going
through this periodically that led to setting up the financial reserve
Astern, e v e n t u a l l y , so that you wouldn't get these p r o b l e m s .
Well
enyway
the world situation is somewhat the same.
As the amount of
^ p o s i t s increase greatly compared to gold
you've got in this a
basically unstable situation where people feared that w h e n the crunch
came that if everybody suddenly lined up outside the bank and all
*ushed for the reserves of the b a n k , the bank wouldn't be able to pay
off. And this is obviously true of any
system.
If all your
depositors come and try to get their cash i m m e d i a t e l y , you can t do
it.
So this has been a w o r r i s o m e thing.
,
,, ,, V t l o u n e c o _
Ten or fifteen years ago, it was pointed out by a w e l l - k n o w n eco
nomist that situation was going to h a p p e n , and that the only way that
you could really stop this from happening was by getting some o t h e r
sort of reserve s y s t e m , e i t h e r having everybody ^accept the dollar,
having everybody accept international funds and'making it large enough
h a v i n e what we now have hoped to g e t - s o - c a l l e d special drawing
Rights! w h i c h is
^ i o ^ S - T S
r u n ^ e ^
b
a
n
k
i
n
g
W o ^ T f n t ^ r n a U ^ s ^ t l ^ f i f h a s ° b e e n run
with a limited amount
of P o l d in it, because the world was growing too fast for it, just as
in fhis country we had to take gold out of .<
the country was growing too fast.
But again, it is the same problem
of compounding that I was talking about earlier
Well
given this
Problem, then the question is, 'What has the price or go
completely"artificial^
in 1936
or something like that, w h e t h e r there was a logical reason
for it o r n o t , is not that clear, but having once set the price at
$35.00 an o u n c e , ever since t h e n , the price of gold h a s been p e g g e a o y
the willingness of the central banks of the world and usually the Fed
eral Reserve, to buy gold at $35.00 an o u n c e .
-31
V
'
you ask what the real value of gold is for industrial purposes
0r
transactions purposes or something like that, you' can get all sorts
^ e s t i m a t e s : $12 .00 an ounce, $15.00 an ounce, what-have-you.
But
de P°int has been that during most of the period all the surplus
al
wilv^
^ a y s been furnished by the central banks.
They have been
ng t o
n0w .
buy and sell gold at this fixed price.
Well, the problem
^
the last year or two clearly has been that as the ratio of
am* U n * t e d States total amount of dollars held by foreigners to the
"Wen*
Sold has grown less, foreigners have come in and said,
w
And
hat if we all got in line, you wouldn't be able to pay us off."
to ' c l e a r l y , this is true.
So the only real answer to it then, is
act Say ' :'°^ay, w e will, as we have said, pay up to all we have, and
y o u d dn
of t i ^ ^
i ' t have other central banks buying it, the idea
Of- the individuals of the world hoarding an additional 12 billion dollars
it §°ld is
is hard
hard to
to imagine.
imagine. There
There wouldn't
wouldn't be
be even
even the
the places
places to
to keep
keep
ven
fnean?1 eeven
though
gold
doesn't
take
much
room.
But
what
this
has
though gold doesn't take much room.
But what this has
then,
is
to
be
sure
that
the
present
system
is stable, really has
*e qui
"OiHaired
l
~~ an agreement
U^i C^lll^il U among
» 1 f^
-A. <-countries
A is— wwvtllof the " world "
"
y
allJ.the
that
they
make t h e i r
S o l d available at $35.00 an ounce.
Well, you have the
m e n t 1 -i- l.
_Lfc>
r e Ju£> iD u e u
d U U U L
C V G i y
QJ.^
w c c i \ 0 ,
J L n ^ x u u x i l ^
y
^ u v- j.
,
in Rn ease
, it is
reissued
about
every
six
weeks,
including
yesterday,
^> and in different places.
But as in any speculative situation,
the
^w ua point
To
• . where people think the agreement means .
«V> -f-it,'4-says
is
what
A R ^
fUi.il L Wiiex't:
{Jeupo-C Lllll^ Hie agl ccmcil C
WHU...
.A.
Ce nt a point which they don't.
So the problem is really that "Are the
banks of the world really willing to throw the $40 billion
e^t • Million dollars of gold into the market and let the speculators
chi-if**5 in effect, or at some point will enough central banks become
to say t h a t the g a m e is c a l l e d off?
^ieri
"
Well, I think that we have
PIto make it very clear that we believe that the game should be
^ied^ t o t h e e n d ' a n d t h e r e a s o n a ^ a i n is the one that Professor
the
Pointed out.
What difference would it make if you changed
Vou P r i c e of gold?
It is an artificial price.
If you change it,
ly
now dealing with an artificial price but you are back to exactho]^. s a m e situation that you were before, except that because the
s
omeln®s
gold are uneven, some people will win in the game, and
Win People will lose, the fact that Russia and South Africa will
ab 0 l L m a kes many people in France, really makes many people unhappy
a
change.
This is one of the perhaps good arguments against it.
the m o r e
basic argument, I think, is that there isn't any
d o i ^ .good reason to change the price.
You don't get anywhere by
Of t ? it. And, as I say, the whole question is whether the countries
°Ut.tle w orld are convinced enough of this to say, "Let's pour it all
There are other simple ways in which you can take the place of
' v arious forms of paper gold.
It hasn't been necessary up u n t i l —
up until now, but supposedly at the end of the month we
this e entering our first agreement on paper gold.
If necessary,
m o v e
forward very rapidly.
Well, as I say, that is the gold
that e m Now, the reason that it has become a problem, though, is
0v
•t0
e r the last five or six years, whereas people used to be eager
is ^
dollars, they have no longer been eager to get dollars.
This
e
balance of payments problem.
Well, what is the balance of payVe w s Problem?
Balance of payments problem is simply the fact that
certain foreign resources.
We are not a country that stays
to ourself.
We have troops in Viet Nam, we have troops in
fov^jy> we have troops in other NATO countries.
They cost us three to
? U l i o n dollars a year in foreign exchange.
Now, this is over the
^ U i o n or so that they cost us in expenditures in this country.
-4-
this says that to keep those troops there we have to get 3 or
billion dollars of Yen, or Francs, or Marks, or pounds s t e r l i n g ,
or so on, to pay for what these troops spend in those countries.
addition to t h a t , we like to travel.
A m e r i c a n s are great travelers.
We spend 3 or 4 billion dollars a year in foreign countries on travel.
s
° we have to again get Canadian dollars or Mexican pesos or Francs,
or Lire, o r something like that, to pay the foreigners when we are
lri
this country, for their h o t e l s , the cars we rent there, the food,
?r other things.
That is a second e x p e n d i t u r e .
The third expenditure
ls
imports.
I don't think my wTfe-Jaas French clothes on at the moment,
a
nd we didn't have any French w i n e , but if you go along in an average
American h o u s e , we do have all sorts of foreign goods that we buy,
an
d again, we have to be able to pay for those and finally, the. other
ma
j o r expenditure is that'we have been buying up companies around the
Jjorld at a r a t h e r rapid rate.
We" boutht Rootes, we bought Simca, we
bought B r o w n — a s you go around the w o r l d , you find both companies
being bought out and A m e r i c a n companies building a plant and equipment there, all of these cost money.
We have to have foreign resourCe
s to buy this, foreign exchange to do this.
You can't do it with
p i l a r s , because if you, for e x a m p l e , tip the w a i t e r in a Parisian
H
°tel he may be glad to accept y o u r d o l l a r , but he doesn't go out
4
spend that dollar in turn, he takes it to the bank and gets Francs
°r it, and the man who gives him the Francs has to be able to turn
l
bat dollar in and get Francs for it or has to find somebody who
Wa
n t s it.
Now, the way we earn those dollars, then, is by again exPorting A m e r i c a n goods, p r i m a r i l y .
We also have a sizeable income on
° u r foreign i n v e s t m e n t s , and we have some people come and travel here.
T u t when you put all of these together, the net deficit for the last-:it
has run on that deficit ever since 19 50 , I guess, and in the last —
th
i s last y e a r it w a s between 3 and 4 billion dollars, in the previous
years it has run not quite as large, but fairly similar amounts.
So
this says then, is that we simply don't have the resources to
these goods that we are spending money on.
Well, how do you get
^ e g o o d s ? J You have to get some foreign country to lend you the money.
In
other w o r d s , it is just again like a bank.
If you don't have the
^oney to spend, but want to buy some goods, you can go to the bank
borrow the money from them, then you can go out and spend it, and
^bis i s what we have been doing now, ever since 19 50.
W e l l , for a long t i m e , the foreign countries were happy to lend to
Us
> because they wanted dollar instruments.
They wanted to be owed
dollars in the U.S. because they thought of them as a very good investment.
But as the amount of dollars have grown more and more, they
hav
e felt less willing to take these, and for the last 3 or H
years,
have sort of had to twist their arms.
In certain cases, we have
.a<3 to do this to get them to accept them.
A n d , for e x a m p l e ,
Germany we have said, "Look, w e don't really like A m e r i c a n troops
in
Germany, this is for your p r o t e c t i o n , if you want us to keep
droops here you ought to pay part of the cost of keeping them in Marks,"
ar
*d so on, in various deals of this sort around the w o r l d .
But each
^ a r that you twist it becomes a little h a r d e r to do it, and also the
'iet Nam W a r has become m o r e expensive each y e a r , so the problem has
ecome more c o m p l i c a t e d .
And as a r e s u l t , you have to say, "Okay,
do we do about it?"
The decisions have been to put in programs
Jbat would cut down the amount of resources you would need abroad,
putting in, making it h a r d e r or more expensive for A m e r i c a n s to
s
pend dollars abroad for various p u r p o s e s .
W e l l , where do we go?
is 3
ofes
s o r Friedman pointed the thing:
One, since the deficit
billion, and that is also about the amount of our military
w
n o cx end
ou1h
-res — ^ y o u
P
i t u r e s you might hope that this
u
Uon
y ° back into balance "rminedi at ely. Actually, the projects Q ? v m a d e i n 1 9 6 4 which looked pretty good and looked pretty good
keen x r b a s e s ^ which excluded Viet Nam, showed that we would have
^ ? l a n c e b y this poiftt, but in addition to the end of military
a
is A?
^ r o a d , we'have the existing programs, but beyond that
that
other major point, is the one Professor Friedman said,
If £ W e # h a v e to have foreign prices rising relative to American prices
Prices, you say, rise, at one or two per cent a year
fasit K, a n A f r i c a n prices, then this means we can export more, it makes
it
expensive to import, it makes it cheaper for Europeans t o —
VOU
of some of the investment problems and so on, so that
in
I ^ft i
this way.
Well, as I say, I'm not here to predict,
of
here to explain.
But I hope, because I know that this is one
I.Q
.
** *•confusing
v-viuuoxiig problems
pi uuxciiio around,
ai uunu , it
a. uhas
nao suddenly
a uuutuxyhit
ux vAmericans
. nuiv-i
to
roost
ly^
"Why do we have this gold problem?"
And I think, incorrectUot
" t w o problems in the papers are normally confused.
They are
p
s e a t e d rather clearly, but they are really two very separate
!:ms with:
One, the possibility of solving one without being
fcl0se?°
the other, or vice-versa.
They are not really that
ei
t 0 o J < y linked in terms of possible solutions.
Well, I think I
a
little long to answer the one question, but I did think it
an
important one.
I won't try any more.
4
<
@FedFRASER