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H. D. Galusha, Jr.
M e m b e r B a n k Se r v i c e s C o n f .
Great Falls & B i l l i n g s , M o n t
Sept. 20 & 21, 1967
AN A S S E S S M E N T OF C U R R E N T M O N E T A R Y P O L I C Y

Of late,

I h a v e been ta k i n g e v e r y o p p o r t u n i t y to u r g e s uppor t of

the P r e s i d e n t ' s call f o r an i n c r e a s e in taxes.
today.

N o r am I g o i n g to rele n t

I am m o r e c o n v i n c e d than I wa s e v e n two or t hree w e e k s ago that an

i n c r e a s e in taxes is i m p erative.
U n l e s s s o m e t h i n g is done to cur b d e m a n d fo r the n a t i o n ' s output,
we are g o i n g to h a v e m o r e i n f l a t i o n in 1968; and a g o o d deal more, not
just a l i t t l e more.

But we should,

I believe, w a n t ve r y m u c h to a void m o r e

inflation;

a bove all, b e c a u s e it is a c a p r icious,

taxation.

Then,

i n e q u i t a b l e f o r m of

too, f u r t h e r i n c r e a s e s in ou r p r i c e s w o u l d not m a k e it

any e a s i e r f o r us to get o u r i n t e r n a t i o n a l a c c o u n t into balance.
as the U.S.

is e c o n o m i c a l l y ,

Mighty

time m a y be r u n n i n g out f o r it.

T h e r e are, of course, v a r i o u s w a y s in w h i c h ov e r a l l d e m a n d f o r
the n a t i o n ' s o u t p u t c o u l d be curbed.
defense expenditures.
tax increase,

T h e g o v e r n m e n t cou l d cut its non-

It is eas y to s y m p a t h i z e w i t h this a l t e r n a t i v e to a

a l t h o u g h w i t h wha t we h a v e lived t h r o u g h in r e cent months ,

one

can r e a s o n a b l y w o n d e r w h e t h e r n o w is the time to cut w e l f a r e e x p e n d i t u r e s
furth e r.

D e f e r r i n g social m a i n t e n a n c e p r o g r a m s too long has the c u m u l a t i v e

e f f e c t s of p o s t p o n e d e q u i p m e n t m a i n t e n a n c e .

The l o n g e r y ou put off the

r e p a i r s the b i g g e r the r i s k of even t u a l m a j o r b r e a k d o w n s .

In any event,

c u t t i n g n o n d e f e n s e e x p e n d i t u r e s is not a p r a c t i c a l a l t e r n a t i v e to i n c r e a s i n g
taxes.
fact is,

Some cuts h a v e a l r e a d y been made,
though,

and m o r e will be,

I am sure.

The

that n o n d e f e n s e e x p e n d i t u r e s ca n n o t be cut s u f f i c i e n t l y .

N o r in the p i n c h w o u l d y o u wan t th e m to be.

A s u f f i c i e n t cut w o u l d lop off

p r o g r a m s w h i c h all of y o u thi n k of, not as f r i volous,

but as e s s ential.

P e r h a p s the b u s i n e s s c o m m u n i t y is w i s e to insist on some cuts in n o n d e f e n s e
e x p e n d i t u r e s as the p r i c e of its support fo r an i n c r e a s e in taxes.




But h o p e f u l l y it w i l l not k id itself that c u t t i n g e x p e n d i t u r e s is a p r a c t i c a l
a l t e r n a t i v e to i n c r e a s i n g taxss.
In s t e a d of i n c r e a s i n g taxes, w e m i g h t i n c r e a s e i n t e r e s t rates.
is a n o t h e r a l t e r n a t i v e .

This

But if w e rely on m o n e t a r y r e s t r a i n t alone, as w e

did in 1966, the r e s u l t i n g c r edit c r u n c h will by c o m p a r i s o n m a k e 1966 see m
like a y e a r of e a s y money.

Thi s is w h a t C h a i r m a n M a r t i n and f o r m e r S e c r e t a r y

of the T r e a s u r y D i l l o n told C o n g r e s s last week, and I ha v e no d o u b t but that
t h e y w e r e right.

So a g a i n I come ba c k to m y point; there is no p r a c t i c a l

a l t e r n a t i v e to i n c r e a s i n g taxes.

I s i n c e r e l y hope all of y o u real i z e this.

i c ' k ' k ' k ' k ' k ' k ' k ' k

Let me turn now, however,

f r o m t a l k i n g of the p r e s s i n g need -- or

s h o u l d I hav e said d e p r e s s i n g need -- f o r an i n c r e a s e in taxes, and ta l k
b r i e f l y ab o u t the p l a n f or i n c r e a s i n g the w o r l d ’ m o n e t a r y r e s e r v e s w h i c h
s
wil l be a d o p t e d by the I n t e r n a t i o n a l M o n e t a r y Fund in a w e e k or so.

The

s pecial d r a w i n g righ t s plan, as I shall r efer to it, has b e e n h a i l e d by the
P r e s i d e n t as the " g r e a t e s t f o r w a r d step in w o r l d f i n a n c i a l c o o p e r a t i o n in
the t w e n t y y e a r s since the c r e a t i o n of the I n t e r n a t i o n a l M o n e t a r y Fund i t ­
self."

For m y s elf,

I w o u l d find it ha r d to take issue

w i t h this claim.

F o r a n u m b e r of w e s t e r n c o u n t r i e s -- chief a m o n g them,

the U n i t e d

S t a t e s and the U n i t e d K i n g d o m -- the o b j e c t of i n t e r n a t i o n a l m o n e t a r y r e f o r m
h as b e e n to i n c r e a s e the s u p p l y of i n t e r n a t i o n a l r e s e r v e s or m o ney, an d to
e n s u r e that this s u p p l y wil l in the f u t u r e i n c r e a s e as the v o l u m e of w o r l d
t r a d e increases.
d i f f i c u l t to find.

Nor is the reas o n f o r t h e i r h a v i n g a d o p t e d this o b j e c t i v e
T h e s u p p l y of i n t e r n a t i o n a l re s e r v e s h as i n c r e a s e d h a r d l y

at all in recent years.

E a c h year, of course, m o r e gold has b e e n produced.

But p r o d u c t i o n has not k e p t pace w i t h w o r l d trade.

Moreover, newly mined

go l d as has b e e n g o i n g not to the w e s t e r n w o r l d ’ central ba n k s but to s p e c u ­
s
lators and o t h e r s bo u g h t up the w h o l e of the 1966 ou t p u t of gold, and m o r e



b e s i d e s,

so central banks'
F or m a n y years,

c o m b i n e d h o l d i n g s of gold a c t u a l l y decline.

c e n tral banks in o t h e r c o u n t r i e s w e r e h a p p y to

i n c r e a s e t h e i r i n t e r n a t i o n a l rese r v e s by a c c u m u l a t i n g d o l lars.

And w i t h

the U. S. r u n n i n g d e f i c i t s and t h e r e b y s u p p l y i n g d o l l a r s to the world,
international

re s e r v e s did i n c r e a s e for awhile.

But central b a n k s in o t h e r

c o u n t r i e s hav e b e c o m e r e l u c t a n t h o l d e r s of dollars.
come to w a n t not m o r e dollars,

Increasingly,

they have

but gold.

F o r one c o u n t r y -- e v e n a c o u n t r y as e c o n o m i c a l l y d o m i n a n t as the
U. S. is -- to run c o n t i n u i n g d e f i c i t s is not a s a t i s f a c t o r y w a y of
increasing international

reserves.

of a n y c o u n t r y ’ c u r r e n c y increase,
s
suspect, and t h e r e f o r e
the event,

It is just that as f o r e i g n e r s ’ h o l d i n g s
the c u r r e n c y m u s t b e c o m e mor e and m o r e

less and less a c c e p t a b l e as a r eserve asset.

this is w h a t has h appened.

Nor is it c l e a r that the U.

In
S. w o u l d

w i l l i n g l y run d e f i c i t s i n d e f i n i t e l y , e v e n if this w e r e the o n l y w a y of
i n c r e a s i n g the su p p l y of i n t e r n a t i o n a l reserves.
A nyway, w i t h the p r o d u c t i o n of gold i n c r e a s i n g little f r o m y e a r to
year, and the d o l l a r b e c o m i n g less a c c e p t a b l e as a re s e r v e asset,
h as b e e n then for a n ew k i n d of i n t e r n a t i o n a l money.
i n v e n t e d in L o n d o n last month.

the s e a r c h

W h i c h is w h a t w as

The special d r a w i n g rights,

so-called, are

i n t e r n a t i o n a l money.
The L o n d o n plan is e s s e n t i a l l y this:
e ffe c t ,

once the p l a n is put into

then the m e m b e r s of the IMF will d e c i d e the a m o u n t of special d r a w ­

ing r i ghts to cr e a t e eac h year, and e a c h m e m b e r will get its pro rata share.
E a c h year,

then, c o u n t r i e s b e l o n g i n g to the IMF will find t heir i n t e r n a t i o n a l

r e s e r v e s i n c r e a s e d by the am o u n t of t h e i r shares of the n e w l y crea t e d s p e cial
d r a w i n g rights.

T h e s e special d r a w i n g rights can be used to pu r c h a s e the

c u r r e n c i e s of o t h e r c o u n t r i e s -- or, in o t h e r words,




to settle i n t e r n a t i o n a l

-

d e f i c i t s w i t h o t h e r countries.
as money,

4

-

C o u n t r i e s must accept these d r a w i n g rights

at least up to some limit,

e x c h a n g e f o r this n e w k i n d of money,

or p r o v i d e th e i r c u r r e n c i e s in
but can in the i r turns u s e a c c u m u l a t e d

s pecial d r a w i n g rights to c o v e r d e f i c i t s of t heir own.
For the special d r a w i n g rights p l a n to be put into effect,

it is

r e q u i r e d that 85 p e r cent of the IMF vo t e s be cast in the a f f i r mative.
An d f o r any amount of special d r a w i n g rights to be created,
the v o tes must be cast in the a f firmative.

85 p e r cent of

Since the co m m o n m a r k e t c o u n t r i e s

h a v e m o r e than 15 p e r cent of the IMF votes,

they can ve t o p u t t i n g the p l a n

into e f fect; and they can v e t o the c r e a t i o n of any g i v e n amount of special
d r a w i n g rights.

T h e s e c o u n t r i e s w e r e g i v e n ve t o p o w e r in re t u r n for th e i r

a p p r o v i n g the plan itself.

W h i c h is p e r h a p s r e a s o n a b l e enough,

t o g e t h e r they are an e c o n o m i c p o w e r of gre a t signif i c a n c e .
arises,

since

The q u e s t i o n

though, w h e t h e r the co m m o n m a r k e t c o u n t r i e s will vo t e as a block,

and, until the U.S. gets b a c k into pa y m e n t balance,
L o n d o n pla n into effect,

v e t o p u t t i n g the

T h e r e are m a n y -- a m o n g them, f o r m e r U n d e r

S e c r e t a r y of the Treasury,

Robert Roo s a -- w h o thi n k not.

F o r myself,

I

w o u l d o n l y p o int out that the o t h e r c o m m o n m a r k e t c o u n t r i e s h a v e not
i n v a r i a b l y f o l l o w e d Ge n e r a l De G a u l l e ’ lead.
s
The F r e n c h h a v e c l a i m e d that the L o n d o n p l a n was a v i c t o r y for
them,

and the p h r a s e " s p e c i a l d r a w i n g r i g h t s ” w o u l d see m to suggest as

much,

si n c e all al o n g F i n a n c e M i n i s t e r D e b r u e has a r g u e d a g a i n s t c r e a t i n g

n e w i n t e r n a t i o n a l m o n e y and f or c r e a t i n g n e w i n t e r n a t i o n a l c r edit lines.
But a n e w kind of i n t e r n a t i o n a l m o n e y was c r e a t e d in London.
d r a w i n g rights can be used,

as I hav e said,

to c o v e r i n t e r n a t i o n a l defi c i t s ,

and up to some limit do not h a v e to be paid back.
i n d i c a t e that they are money,
victory.



not credit.

The special

W h i c h w o u l d s e e m to

So it is the U.S. w h i c h w o n the

It is easy for o u t s i d e r s -- for those w h o h a v e not b e e n locke d in
m o r t a l co m b a t w i t h the F r e n c h -- to be s keptical of the special d r a w i n g
rights plan.

But time will show,

I believe,

the w e s t e r n w o r l d took a big step forward.
clear.

that in a p p r o v i n g the p l a n
One thing,

though,

is p e r f e c t l y

It is e x t r e m e l y f o r t u n a t e that some kind of p l a n was a p p r o v e d in

London,

Had the A u g u s t L o n d o n m e e t i n g b r o k e n up in d i s a g r e e m e n t ,

s i t u a t i o n could h a v e got v e r y grave.

the

It m a y be that S e c r e t a r y of the

T r e a s u r y F o w l e r did not f u l l y a p p r e c i a t e the ris k he was taki n g when,
f o u r y ears ago, he is s u e d his call for i n t e r n a t i o n a l m o n e t a r y reform.
A f t e r a g r e e m e n t on the special d r a w i n g rights p l a n was announced,

gold

shares t u m b l e d and d e m a n d f or gold in the L o n d o n m a r k e t d e c r e a s e d r a t h e r
sharply.

Had there been no such ann o u n c e m e n t ,

though,

s p e c u l a t i o n ag a i n s t

the d o l l a r w o u l d almo s t c e r t a i n l y h a v e b e c o m e m u c h m o r e in t e n s e than it
had been.
T h e r e has long be e n a fear, u n d o u b t e d l y justified,
p r i n t i n g m o n e y to p ay f or t h e i r own e x p e n d i t u r e s .
organization,

the IMF,

N o w an i n t e r n a t i o n a l

or a c o l l e c t i o n of g o v e r n m e n t s ,

i n t e r n a t i o n a l l y a c c e p t e d money,
i n f l a t i o n just a f e w years off.

of g o v e r n m e n t s

is g o i n g to p rin t

so some will be fe a r f u l of a w o r l d - w i d e
For myself,

I w o u l d be s k e p t i c a l

the IMF m e m b e r s h i p a p p r o v e s the special d r a w i n g rights plan,
be like the S p a n i s h d i s c o v e r i n g Aztec Go l d all o v e r again.

that when

it is g o i n g to
The w e s t e r n

w o r l d ’ g o v e r n m e n t ’ c e n tral b anks are e n t i r e l y aw a r e of the i n f l a t i o n a r y
s
s
d a n g e r i n h e r e n t in the L o n d o n plan.
rights in i r r e s p o n s i b l e amounts.
money,

to be sure,

They are not to c r e a t e special d r a w i n g

They are g o i n g to c r e a t e i n t e r n a t i o n a l

by onl y e n o u g h to p r e v e n t the w e s t e r n w o r l d f r o m s l i p p i n g

into a d e f l a t i o n a r y spiral c a u s e d by a s h o r t a g e of i n t e r n a t i o n a l reserves.