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Statement by- William McChesney M a r t i n , J r . before the Subcommittee on I n t e r n a t i o n a l F i n a n c e and R e s o u r c e s of the C o m m i t t e e on F i n a n c e United States Senate June 1, 1973 Let m e m a k e c l e a r at the outset that I a m b a s i c a l l y o p t i m i s t i c about the A m e r i c a n economy. m a t t e r of speed. o c c u r r i n g today. My only r e s e r v a t i o n s a r e in t h e We a r e growing too fast; too m u c h of t o m o r r o w i s We have not yet s c r a t c h e d t h e s u r f a c e of our potential but, like our m o d e r n a u t o m o b i l e , the economy r e q u i r e s safe d r i v e r s , and one who a d v o c a t e s safe d r i v i n g is not an opponent of growth nor i s he one who u r g e s m o r e u n e m p l o y m e n t to r e s t r a i n inflation. Inflation is t h e root c a u s e of t h e c u r r e n t i n t e r n a t i o n a l financial crisis. Events since 1965 c l e a r l y d e m o n s t r a t e how inflation p r o - d u c e s f e v e r i s h activity, i m p a i r s sound growth, u n d e r m i n e s b a l a n c e of p a y m e n t s , and d i s t o r t s t h e savings and i n v e s t m e n t p r o c e s s . Money i s a m e d i u m of exchange, a s t a n d a r d of v a l u e , and a s t o r e of value. The A m e r i c a n dollar in the p o s t w a r w o r l d h a s been t h e p r i n c i p a l bulwark of t h e i n t e r n a t i o n a l p a y m e n t s s y s t e m a s well a s t h e best c u r r e n c y in the world in which to s a v e . This i s no l o n g e r t r u e and now no one has c o m p l e t e confidence in saving in any c u r r e n c y . T h i s accounts for the speculation in gold and t h i s at a t i m e when t h e w6rld needs capital formation d e s p e r a t e l y . When the G e r m a n s decided to let t h e i r c u r r e n c y float and we e m b a r k e d on our new economic policy, we set sail on an u n c h a r t e d -2- sea w h e r e , d e s p i t e a s s u r a n c e s to t h e c o n t r a r y , l i b e r a l t r a d e policy i s going to be buffeted by s e v e r e s t o r m s and, in my j u d g m e n t , our e c o n o m i c , our m o n e t a r y , and our d i p l o m a t i c position has been definitely w e a k e n e d . I think the P r e s i d e n t acted boldly and c o u r a g e o u s l y in r e v e r s i n g his stand a g a i n s t wage and p r i c e c o n t r o l s and taking d i r e c t a c t i o n a g a i n s t inflation. well. P h a s e I w a s definitely a s u c c e s s and P h a s e II did m o d e r a t e l y Wc had a good y e a r in 1972 and b u s i n e s s has been u n u s u a l l y s t r o n g in 1973, so strong in fact that inflation has a l r e a d y r a i s e d its ugly head once again. In o r d e r to b r i n g t h i s about we have engaged in f i s c a l s t i m u l u s so far in e x c e s s of any r e a s o n a b l e r e q u i r e m e n t t h a t , in m y judgment, it b o r d e r s on the i r r e s p o n s i b l e . As a c o u n t e r p a r t , monetary policy had to be e a s y . I s e r i o u s l y question w h e t h e r the full e m p l o y m e n t budget concept i s an adequate a n s w e r . I w e l c o m e the efforts t h e A d m i n i s t r a t i o n is c u r r e n t l y making to limit spending. We m u s t not only have l i m i t s on spending but l i m i t s on the r a t e at which we c o n s u m e t h o s e r e s o u r c e s which we now r e a l i z e a r e not inexhaustible and which, a s a m a t t e r of s i m p l e p r u d e n c e , m u s t not be squandered. In the a b s e n c e of such l i m i t s it is h a r d to s e e how anyone can be confident that we a r e not heading into a n o t h e r inflationary s p i r a l which will have a s its a f t e r m a t h the inevitable r e c e s s i o n . The boom which we have produced by a combination of fiscal s t i m u l u s and easy money i s n o w r u n n i n g into s h o r t a g e s of capacity and u n f o r e s e e n w e a t h e r p r o b l e m s -3- to p r o d u c e a flood of b u s i n e s s froth which is now c r e s t i n g and will, I think, r e s u l t in at l e a s t a m o d e r a t e r e c e s s i o n by the end of t h i s y e a r or the middle of the next. But my view of inflation is c l e a r . To t h o s e who believe that full e m p l o y m e n t r e q u i r e s inflation, my conviction is that unless inflation is r e s t r a i n e d full e m p l o y m e n t i s i m p o s s i b l e . I happen to believe t h a t at l e a s t r e l a t i v e l y full e m p l o y m e n t on a s u s t a i n a b l e b a s i s i s not only d e s i r a b l e but f e a s i b l e and can be achieved with high l e v e l s of b u s i n e s s activity if we can find s o m e way of containing inflation and m a i n t a i n i n g r e a s o n a b l e stability. The nations of t h e f r e e w o r l d have b e c o m e r e m a r k a b l y successful a t p r i m i n g the pump and forcing growth but none of u s has yet l e a r n e d how to apply t h e b r a k e s and s u s t a i n growth and employment. We have now t u r n e d back to t h e view that each c o u n t r y can s t i m u l a t e i t s d o m e s t i c economy without r e g a r d to i t s b a l a n c e of p a y m e n t s and withoxit r e g a r d to its i m p a c t on o t h e r s . In s h o r t , t h i s m a r k s the end of an e r a of i n t e r n a t i o n a l economic and m o n e t a r y c o o p e r a tion envisaged in t h e B r e t t o n Woods A g r e e m e n t s Act. And now I want to say a few things about the d o l l a r . I am d i s t r e s s e d when people say, "Thank goodness we have devalued the dollar. M That it b e c a m e n e c e s s a r y and even d e s i r a b l e to do so cannot o b s c u r e the fact that it r e p r e s e n t s a failure of United States economic -4- policy-~a failure to r e s t r a i n inflation and f a i l u r e to i m p r o v e our b a l a n c e of p a y m e n t s . I approved of the f i r s t devaluation, however r e l u c t a n t l y , and accepted it as both n e c e s s a r y and e s s e n t i a l to give u s a new s t a r t . And I was not inclined to dispute the P r e s i d e n t ' s s t a t e m e n t that the Smithsonian A g r e e m e n t was t h e m o s t significant in the h i s t o r y of the w o r l d , a s s u m i n g we w e r e going to build on it p r o m p t l y and effectively. However, we b e c a m e suspended in an euphoria of belief that t h e r e a l i g n m e n t of c u r r e n c i e s on that o c c a s i o n s e t t l e d a l l our t r o u b l e s . This was c e r t a i n l y not t h e c a s e a s was d e m o n s t r a t e d by the second devaluation of the dollar in F e b r u a r y of t h i s y e a r . I do not think t h i s second devaluation w a s n e c e s s a r y ; the dollar i s now, in my judgment, u n d e r v a l u e d and it is going t o t a k e c o n s i d e r a b l e t i m e to p e r s u a d e people that we a r e not going t o do it again. On a r e c e n t t r i p in E u r o p e I was a s k e d r e p e a t e d l y , "How soon will t h e d o l l a r be devalued again? the end. n and was unable to p e r s u a d e anyone that we had s e e n I think it is now i m p e r a t i v e that we defend t h e value of the d o l l a r by intervening actively to s u p p o r t s its value w h e n e v e r t h r e a t e n e d . It is not yet believed that we a r e p r e p a r e d to go all out to m a k e t h e d o l l a r a c u r r e n c y in which it is useful to s a v e . I a m appalled by t h o s e in t h i s country who think that convertibility of the d o l l a r i s of no i m p o r t a n c e and who believe we can c o n c e n t r a t e all of our attention on s t i m u l a t i n g the d o m e s t i c economy without .regard to our d e t e r i o r a t i n g b a l a n c e of p a y m e n t s . -5- Unless nations a r e willing to have fiscal and m o n e t a r y r e s p o n s i b i l i t y t h e r e is no way we can deal effectively with u n e m p l o y m e n t and p r o d u c e l a s t i n g prosperity. I a m s u r e it will t a k e t i m e , &s we a r e p r e s e n t l y l e a r n i n g , to r e c o n s t i t u t e our i n t e r n a t i o n a l m o n e t a r y s y s t e m but it is e s s e n t i a l . I believe that t h e I n t e r n a t i o n a l Monetary Fund should be c o n v e r t e d a s rapidly a s p o s s i b l e into s o m e f o r m of a World C e n t r a l Bank. S e c r e t a r y Shultz, in his splendid s p e e c h at t h e m e e t i n g on S e p t e m b e r 26, 1972, stated, and I quote: " S e v e r a l t i m e s today, I have s t r e s s e d the need for a c o m p r e h e n s i v e new set of m o n e t a r y r u l e s . T h o s e r u l e s will need to be placed under g u a r d i a n s h i p of t h e I M F , which m u s t be p r e p a r e d to a s s u m e an even m o r e c r i t i c a l r o l e in t h e world economy. "Given the i n t e r r e l a t i o n s h i p s between t r a d e and p a y m e n t s , that r o l e will not be effectively d i s c h a r g e d without h a r m o n i z i n g the r u l e s of the IMF and the GATT and achieving a c l o s e w o r k ing r e l a t i o n s h i p . n I would go further than he d o e s . I think we m u s t have a F e d e r a l R e s e r v e S y s t e m in E u r o p e and an I n t e r n a t i o n a l Monetary Fund in which nations will pool s o m e portion of t h e i r s o v e r e i g n t y in t h e i r own i n t e r e s t . We do indeed need a new balance between "flexibility and s t a b i l i t y . . . . b e t w e e n unity of p u r p o s e and d i v e r s i t y of execution. !f N e v e r t h e l e s s I a m convinced that we should s a c r i f i c e s o m e individuality and s o m e s m a l l m e a s u r e of sovereignty in what would constitute a World C e n t r a l Bank. Unless we -6- can work out something of this s o r t w e . a r e going to have a lower s t a n d a r d of living in the world than would o t h e r w i s e be a c h i e v e d and we will h a v e frictions that will make keeping t h e p e a c e m o r e difficult. ..-0---
@FedFRASER