View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

1:30 P.M. EST


Excerpts from remarks by
Henry C. Wallich
Member, Board of Governors of the Federal Reserve System
to the
French-American Chamber of Commerce In the United States, Inc.
New York City
March 3, 1980


The world faces severe tests that can be met only by

International cooperation.


Financing of the payments deficits caused by the higher

price of oil should be possible, but it will not be as relatively easy
as it was after the first price increase in 1973-74.


The Euromarkets can contribute importantly to this

financing, but these markets' expansion must be brought under better

Close to $40 billion of Eurodollars are now included in the

Federal Reserve's redefined aggregates.


The international role of the dollar is likely to

diminish over time, but willing and able successors have not appeared.
Evolution of the world monetary system in the direction of a SDR-based
system would be much preferable to a multi-currency reserve system.
International cooperation will be needed to achieve this.


The oil problem also demands cooperation, both for any

possible near-term emergency and for longer run conservation and
substitution of energy sources.

The United States in some respects

faces a more difficult problem than other countries because of its
diminishing availability of easily accessible domestic sources.







Excerpts from remarks by
Henry C. Wallich
Member, Board of Governors of the Federal Reserve System
to the
French-American Chamber of Commerce in the United States, Inc.
New York City
March 3, 1980

I am honored to be addressing the French-American
Chamber of Commerce on the subject "Policies for the 1980's."

The Tests Ahead
The 1980's will be a period during which our countries,
and the international economic and financial system that uuites
them, will be severely tested.

In the international sphere, the

principal tests, as I see them, will challenge our ability to
maintain a free and open international financial and trading
system, and to maintain an adequate flow of oil supplies.


the domestic sphere, the principal tests will be those of our
ability to maintain economic growth and stability in the face



of energy shortages and mounting costs and difficulties of
all kinds.

An essential condition of success in this endeavor

will be ability to control the inflation that is now eating away
at our productivity and at our social fabric.

Continued success in expanding world trade and finance
can never be taken for granted.

It is the result of international

cooperation and a willingness to forego temporary national
advantages for the sake of bigger national and international
gains in the long run.

The test before us challenges the

survival power of this cooperation.
1930's, cooperation broke down.

Once before, during the

Individual countries sought to

improve their condition at the expense of their neighbors, through
trade restrictions and payments controls.
the world froze over financially.

Considerable parts of

It became impossible to move

money from one country to another without licenses that were not
generally granted.
pay their creditors.

Debtors, even if solvent, often could not
It was the ice age of international finance.

There is no compelling reason why the world should
ever relapse into anything resembling the conditions of the

But in the face of skyrocketing oil prices the financial

problems generated in large part by these prices will need to be
dealt with, to control that ever-present risk.

The financial

burdens must be distributed in a manner that makes them bearable.



We need to be aware of the parameters of the situation
and what they mean to borrowers.


The OPEC surplus will be more lasting than the

1973-74 created surplus.


The funds to finance the corresponding deficits

are available from OPEC in the aggregate but they oust be
channeled where needed and where debt can be supported.


The non-oil developing countries will probably

not be able to handle as large a rate of increase in their debt
as in recent years, because debt already is high and the banks
already have loaned a great deal.


Developing countries, therefore, must stress

adjustment along with, and perhaps more than, financing of


A larger share of the OPEC-imposed deficit will,

therefore, fall on the developed countries.

-4Financing will be relatively easier for the developed

OPEC funds not flowing into dollars will necessarily

flow into other currencies, providing some automatic financing
to the countries in question.

Countries likely to receive OPEC

investments directly or through the Euromarkets can ease the adjust­
ment process by accepting deficits.

If these countries tried to

run surpluses, this would throw a greater burden of deficits on
other countries.

The Euromarkets
The Euromarkets will be one area in which our ability
to cooperate in financing OPEC-induced deficits will be
conspicuously tested.

The Euromarkets have performed an extremely

valuable function by facilitating the recycling of OPEC funds and
the financing of payments deficits through the world's large banks.
But they are beginning to pose serious questions for the monetary
authorities of the countries whose currencies principally are
used in those markets.

The Euromarkets allow the creation of

dollars, D-mark, and other currencies outside the direct monetary
control of the respective central banks.

The creation of dollar

loans and deposits, for instance, occurs both through U.S. banks'
foreign branches and through the banks of other countries.



Creation of a substantial volume of dollar assets and liabili­
ties has an impact, naturally, upon the exchange rate of the
dollar and on interest rates in the United States and elsewhere
on dollar-denominated assets.

The Federal Reserve has moved to take into account
the creation of U.S. money by the Eurobanks.

Some $40 billion

of Eurodollars have been included in the newly redefined
monetary aggregates.

The expansion of these Eurodollars,

which has been far more rapid than that of dollars in the
United States, will henceforward be taken into account in
formulating U.S. monetary policy.

To offset the rapid

expansion of Eurodollars, the expansion of the domestic
component of the aggregates will have to be somewhat slower
if the Federal Reserve's overall money-supply targets are
not to be exceeded and growth of the broadest aggregate is
not to become excessive.

For the time being, this effect

is small, since the volume of Eurodollars is small relative
to U.S. monetary aggregates, but in time it is likely to
grow and gain importance.

Discussions are underway now dealing with
possible means of subjecting the Euromarkets to some degree
of control.

There is widespread agreement on the need to


preserve the safety and soundness of the participating
banks, and the consequent need to maintain or introduce
adequate prudential controls.

With respect to growth

of the markets and the use of various national currencies,
divergent interests of countries need to be reconciled.
Countries that expect to be borrowers in the Euromarket
naturally take a different view than countries in whose
currencies assets and liabilities are being expanded.
Countries that benefit from the presence of the market
in their financial centers have interests different from
the rest.

The Eurodollar market is an analog of the
nonmember banking system in the United States which
also is outside direct Federal Reserve control.


of the nonmember bank system has become a problem Congress
is having to face.

Growth of Euromarkets may eventually

generate similar compulsions.

Role of the Dollar
The international role of the dollar will be an
important feature of the international scene.

There seems

to be a growing feeling that this role, far from being an



enormous advantage, is becoming excessively burdensome to
the United States.
replace the dollar.

But there are no eager candidates to
Germany, Switzerland, and Japan, whose

currencies all might serve in this role, show varying degrees
of reluctance.

A return to gold, I believe, is unviable.


wide fluctuations in the price of this metal make clear
that it cannot form a basis for stable relations among
currencies, even if present high domestic rates of inflation
did not make stable relations impossible.

A basket of

currencies, such as the SDR, seems the most logical way to
reduce risk in the holding of official reserve balances.
Eventually perhaps, it may become a medium for private
financial assets and liabilities.

An SDR solution would

be far preferable to a multi-reserve currency system which
may be the consequence of letting matters drift in this

Cooperation among countries at present can usefully
be oriented toward creation of a substitution account in the
International Monetary Fund.

This account would absorb some

official dollars and would move the SDR closer to becoming


an important world reserve medium.

It is presently under

discussion in the International Monetary Fund.

The Challenge of Oil
The supply of oil is a second major area in which
international cooperation will be needed.
are precariously balanced.

Supply and demand

We have recently seen how a

slight imbalance, manifested in a substantial premium price
in the spot market, can lead to a ratcheting of OPEC prices.
We have seen also how the fear of rising prices and even more
or shortages can give rise to inventory accumulation that in
turn aggravates the price movement and the supply/demand

Cooperation among oil-importing countries to

avoid a repetition of the recent scramble is urgent.

Cooperation would also be needed if through some
political or technological accident supplies should be

Such situations might still be manageable if

arrangements established under the International Energy
Agency can be implemented smoothly.

The consequences of

a disorganized scramble among nations for inadequate oil
supplies could be disastrous.


For the longer run, each country must act to
conserve energy and to create substitute energy sources
to replace imported oil.
national cooperation.

This, too, is a form of inter­

Any one country could perhaps rely

on the efforts of others to keep adequate oil supplies

But in the aggregate, this would be self-defeating.

The United States faces in some respects a more
severe problem than other countries.

From a position of

self-sufficiency in oil, we have been moving toward rising
imports as domestic production declined.

Our efforts at

conservation and substitution must cope with the double
problems of rising demand and progressive exhaustion of
easily accessible supplies.

This must be accomplished in

the face of a geographic and industrial structure posing
particularly severe obstacles.

Domestic Policies to Support International Cooperation
Cooperation in common international problems will
be helped if we deal effectively with domestic matters.


the 1980's, policies will have to be directed toward combating
inflation, reducing unemployment, and increasing productivity



and growth.


These are major challenges, and so far success

has been far from satisfying, especially in the United States.
Stronger and stabler domestic economies will contribute to
the growth of the world economy and to the solution of inter­
national problems.