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Hugh D. Gal/usha.................... President, Federal Reserve Bank of Minneapolis
A transcript of Mr. Gal/usha’s presentation follows:
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How-^tho man oould.ge.t_.back to Bonton^ the ms» interrupted him and said, "Hell, don't
do that, just point"• We are in a position now in this country where most people
want someone to point* i&it there is no hope for us'beemsee it is a very complicated
worldlwo njpftwiin and
do have to lia ^ f iuic
resort to trrmhnfrlr)^ aaaee if
I lapse into fancy language I hope you will bear with me.
am not going to speak very longer I would much prefer wi£h tfri-e-^yowjp■oaq»
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so many old friends in the group, to spend most of the‘time^v«b*h questions.
But I
thought I would give you some idea how we go about making it difficult for you people
to borrow money at a rate that you can afford.
>
The reason we are in this position m
ogSSSs external
fairly simple.
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There are two kinds .*
internal/o Externally the dollar^ hdfre been under pressure;
it has been necessary to keep rates high in order to prevent outflows of capital to
other countries of the World.
We have been running a continued deficit in our balance
of payments, i\Ua±efeBd»»**is pimply ttofe we have been spending more dollars abroad than
UVs
we have been receiving
v/e have been spending
a number of ways£ Vietnam,*
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imports,
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/*~ty
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.
S. Corporations
engaged in virtually every country in the world, and-00me oorporation6-:4n--'
almoct
ezLQi^c oimtry -in...thft-.nor Id.
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vAid has not been as much of a factor as you probably would think^ because most foreign
aid is Mppt tied to U.S. goods, that-is1yon havo to w e— a—gaaey wordf-drt-is cg±fgd
JLfnr^Hp;-ihi p11. Whey eJJaaiu-.camft.-fr- o m T d ^ . |4 ^ 4atmf^— bttt-H;hgrtr^"fe'"i:hg^1rgctmical term.-— "
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”-^S*Fb means that if yaii hnv*? an aid program in one of the underdeveloped countries,
the capital goods I the generators or whatever are going to be purchased for use in
that country^ have to be purchased in
the U.S. so it deca n i .have--any-effoot on-»
:a^ai3.02I^'i^Thave b i
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Tirith-ea e o f th e e x t e r n a l r e a s o n s ,
bs*re al
.)
The British c<
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years -for the United Ki-ng-doa have * v>°
"
pressure^ against
i-
the dollar becaus^/(Aien people get nervous about their money,they do not tend to discrim
inate.
Certainly they want to get rid of the least secure but as^the hysteria grows,
feiiid,JJL-is hy^j-.ardft^ frhey--frond to lose- sight of~^he£he^
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they just simply want to get out of paper and thoy-w«»tr ta got> into goldTaasd
nf dnI3are b<^r>use they havp mnrp do^L'
ar&’^bliaii any ofeh.cn& -f. C * "t-X
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^ 1 1 of this admits that we have had to conduct monetary policy with a very sha,rp eye to tlwasE:
external conditions. //Internally, again we start,, with Vietnam,</the pressures of Vietnam,^
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ifcdws been very serious,'— twenty six/twenty eight birirl4o«^ n 1]jews . It hao boon
incline that tended to level off a little at the~^nd of last year-i-brrt'there is an
_ad^itiQEaX„siLpplemental appropriation for two and a half billion -to go into_thatparticular confiiet^
This has put pressure on our economy^ because ysu prrr Vietnam competes
with you and me for^ goods and services and wlicn thoro ago'-fewor goodo and aujyviiers ’
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jijnniimhl: the law of supply and demand operates and tM » y coot mope. TMo~d^-o»e--of-4he
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w«ys^yeti--^et--what^9^elled'push^uli:" inflation.
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Another is that we have had a tendency in this country, at least on the Congressional
level, to ignore the old maxim of ’’pay for what you get” .
There are a number of very
grievous social maladjustments in this country that have to be remedied if you are
going to keep the country going, and these take money.
We have gotten unemployment down to the level about as low as it can get, that is you
look at the numbers and its 3 .b % .I think this is the rate of unemployment, and that
looks awfully good and then when you analyze it though you find that the white male,
adult male, is down somewhere around Vfz to 1?4, it is good that virtually there is no
unemployment in that category.
You look at the teenager, however, the unskilled
white, that rate is higher, let us say it is five or six, you look at the negro and
it increases to twelve or fourteen.
These are unskilled people who can't do anything and to try to gear an economy going
fast enough so you can pull these people in again is an inflationary fact and you
can't afford to do it.
That is, so called structural unemployment has got to be hit
from some other v/ay through training programs, for example through relocation of
industry.
We have tried to do it through speeding up the economy and it won't work,
so we have to spend money in the city.
Galusha, page 3
I am not going to quarrel with you about the merits of Job Corp or Headstart or the
other programs that have been tried,but programs like these or at least of this
type are going to have to be tried and are going to cost an awful lot of money.
This, too, produces pressure and so far Congress has been unwilling to face up to
the fact that there are expenses, so we have been financing on a debt basis for the
deficit that is really quite striking.
There are only two ways you see to make the country economy run, one is to fiscal
policy which has to do with the level of government receipts and taxation and the
level of government spending.
The other is monetary policy which affects the volume
of money and credits; not only the quantity but the cost.
The fiscal policy is determined by the administration and by Congress and at first
i n ’65 and early *66 the administration failed to use fiscal tools; there was no move
towards restraint.
There was no move towards assigning priorities to determine
what was the most important things to spend money on and what could be deferred.
This is the decision you have to make when Hefty or whoever else is in control
of your money supply says you are going to be cut back.
There was certainly no
move towards a tax increase so the whole burden fell on monetary policies and it
was unfortunate it hit unequally because we don't spray credit in this country by
'copter.
You know there is no way we can get monetary policy so that it leaves the farmer
alone, leaves housing alone.
It goes up through the banking system and the market
place determines who is going to get money.
That is determined by individual bankers
who look at a whole complex of factors, deposit relationship, interest factors,
complexity of loans and so on and the way they looked at it, it was a It easier
to loan money to industrial corporation than it was to housing or to agriculture.
Agriculture fortunately lucked out in that period because agricultural banks
generally were quite liquid because of the high level of foreign income in that
year.
It wasn't until mid-summer of '66 that the Farm Credit System got tough with
the allocation of credit as among the Banks.
I think the administration learned how close we came to disaster.
We did come close
to disaster, there was almost a financial collapse on August 29* 1966, precisely
that day.
But we squeaked through and the President in his message in '67 , as
you know, started talking about a tax increase.
Congress got into a very difficult
bind early because of the appeal of the fiscal restraint.
I don't know what that means
and I am not being facetious, because there are so many programs.
Now does fiscal restraint mean a cutback in the volume of agricultural lending?
There are those who say it does, and they are talking about very substantial sums of
money in terms of a cutback and the authority of the Farm Credit System.
There are
those who say take it out of the hides of the poor, they are poor because they are
stupid and lazy and let them suffer.
aid.
There are those who say take it out of foreign
There isn't a great deal left there to take out and nobody really has been
able to bell that, or wanted to bell that particular cat.
What happened was this:
the poor taxpayer was led down this primrose path and believing in God maybe thisds
the millennium, maybe somebody is thinking about me and they are not going to in
crease my taxes and they are going to save my
Unfortunately that isn't the real world.
??
, it is going to be just great.
The money has to be spent, you can't run
a war on a budget, so the real hangup has been - who will take the responsibility
for making the short terra cut and answering the screams of anguish from the different
constituencies around the United States, and will it be k billion or 6 billion and
its been up and down
like a yoyo.
Two weeks ago I said there wasn't going to be any tax increase and then along came the
French crisis, a number of external factors that put new pressure on the U. S. dollar,
some internal problems including the assassination of King, which put new pressure
on urban programs and it looked then for awhile as if there would be an increase - that
the bill would come out of Mr. Mills' committee last week.
Then somebody counted
noses and found that it wasn't quite so, that there was a possibility it wouldn't
pass, so it went back into committee and now it is to come out, I believe, next week.
So again the burden has fallen on monetary policy and we have been doing two things.
We have been trying to shrink the money supply so there is less available, and we
have also been trying to make it more expensive.
It really isn't enough you know to
make money more expensive, this is a point I made once at a dinner party in
Minneapolis, and one of the people there told a man who happened to be chairman of
our board at the time, "that fellow is crazy, interest rates do matter a great
deal” .
This man to the chairman of our board said, "No, your wrong, you just
never had to borrow any money".
This man happens to have inherited a great many
million dollars which he has guarded very carefully and they have increased.
To a lender, rates become very important.
If you are lending money, rate is very
important and how you, where you put your money, you consider very carefully
and this would seem normal.
People take money out of a savings and loan or out of
a savings account or they don't put it in and instead they go direct to the market
and buy a bond because the yields are higher.
That is another fancy term which I
will contribute to you this afternoon and you will probably never use or see again.
In monetary circles that is called disintermediation.
But rate is making money more expensive.
Is not that significant for a borrower?
The only thing he wants to be sure of is that he isn't paying any higher rate than
his competitor.
I know that I should never be making this in front of people who
are also borrowers, but it is true and so Hefty you and Ed and the others of you
who run FCAs, this may give you some support in increasing your rate.
If you need
money, it is the quantity that is important, interest cost is not all that signifi
cant.
If it should, it hurts until the marginal borrower, it might be enough to
keep him out, but generally it isn't all that significant.
You have to literally
shrink the money supply so there is less of it around and it takes time to do that.
It takes 6 months really before monetary policy begins to bite.
Going either
direction, you know if you are at a time to shrink the money supply or increase it
to stimulate the economy, it takes time.
In the meantime the money markets begin
to feel this pressure and you find rates begin to move up as it becomes harder for
the major money banks to raise money through certificates of deposit, for Federal
agencies to raise money on their money markets because everybody goes to the same well
and again, remember it is the lender who is in control here.
He is going to put his
money where the two factors of security and rates are the best and you look at what
is happening to the pressures on that well and it is kind of frightening.
In 1966 state and local governments were in at this particular well at the rate of
950 billion a month.
money market.
This is the money they were trying to raise in the national
In '67 it was twelve hundred and twenty-one dollars, add a whole bunch
of zeroes there, that is a billion two-hundred and twenty-one million.In 1968 in the
estimated figures for this quarter are at a rate of thirteen or 1.3 billion a month
for industrial corporations, these are utility companies, industrial borrowers.
In 1966 they were trying to get a billion five a month, in 1967 they averaged two
billion a month, in 1968 the figures from May indicate about two billion dollars and
then you add to that the demand from the Federal government.
In July and August
they will probably be looking for 9 billion and no wonder interest rates are going
to be high, because without a tax increase there simply is going to be no dampening
of this level of demand.
Alright, I tried to give you some idea of what led up to this and some idea of the tax,
the situation of the tax increase, what is this going to mean in terms of rate develop
ments in the furure, at least in the next 9 or 10 months.
I am sorry, I can't
simply point the way to borrow because you know it is a fool who prophesied the
direction of rates, there are so many things that can happen.
The accidents that have occurred in the world that have changed the course of history
in just the last three years.
You know the British might have made it if the Israeli
war hadn't broken out last year or in the earlier period of '6A- if Suez had not been
closed.
We might have gotten through this spring in much better shape if the French
students hadn't started a rukus in France.
incidentally, student unrest.
This has been our most successful export,
It is too bad we can't get credit for it from worry,
but it got contagious and 10 million French workers were on strike and this made
Frenchmen very nervous about their own money but it also made a lot of people around
the world who had been holding francs or international currency very nervous about
the pound and it is an accident that nobody could have predicted, but it happened,
and it did have dire results.
It did introduce a new unhappy note in the inter
national money market.
There is no reason to expect international monetary pressure to let up.
The news from
the peace talks in Paris have not been particularly encouraging, it looks pretty
obvious that it isn't going to be ended very soon.
Nor is there any reason to believe
that some kind of an understanding with the North Vietnamese is going to be wholly
acceptable to the South Vietnamese,much less is it predictable that it is going to
reduce our level of commitment in Southeast Asia.
It is going to take an awful lot of money, so the external factors are going to continue
in the reckoning and we are still going to have to think about them and they are going
to have an effect on how much change can occur in U. S. interest rate and if you think
it is a terrible thing that, and there ought to be a better way than to have interest
rates climbing a situation ten thousand, twelve thousand, twenty-thousand miles away
Galusha, page 7
affect interest rates in Dillion or Belgrade or Bozeman or Helena or Minot, North
Dakota.
Maybe there is, but that is the real world.
These things do affect interest rates.
Domestically hov/ever, if a tax bill is passed
my guess is that fairly soon, but I would not like to say how soon, there will be
some backing off of pressures on monetary markets andthe money markets in New York.
There will be a backing off for a number of reasons.
level of expectations of business men.
There would be a change in the
They would start adapting themselves to a
reduced cash flow.
The combination of the short fall in Federal spending, and there will be some, but
it is
only going to be a deferral, plus the tax increase, plus the present level of
monetary restraint would proably be too darn much.
We don't want to kill the economy
we just want to get back to a normal pattern of substainable growth, so my guess is
that given that kind of a circumstance you would find monetary pressures tending
to needs.
How soon it would be, you can remember roughly six months.
It takes six
months for changes in national policy to work their way throug the economy so that
you can start seeing results where you live.
Alright, I don't know how much time I was given, Mr. Chairman (you have plenty of
time.)
I would like to now answer questions, I think I've given you enough
perhaps more than you wanted on the situation of the money market.
I visited
with some of you the other night about this and am perfectly willing to try to
answer questions on the subject.
0 - What is your idea now on the gold standard? Is it necessary anymore?
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----- thnt mnnfr tnri^y are several problems associated with gold.
t#-*•%)
The first one is supply, ^eventy-five percent of the free world gold comes
from South Africa, a country tjsafr we have not been particularly friendly *
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^country that depends upon its gold yhijffuwit to maintain its
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much
the Russian^produce^ or thejShinese,' Imt it is probably a substantial
amount, but not much of it gets into world markets.
The fact is that there has not been one dollar of gold added to free
world monetary stock since 1965w
All of the gold tha% Insert.'Ijilwi produced
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in the free world has either gone intothe hands of hoarders, speculators or
into industrial, professional and artistic uses.
Gold is one of the ways we count a country's liquidity.
made up of^three things:
the^ wweunt of"gold
A country's liquidity is
the amount of foreign currency
it •jrtT'holdiii^'and its credit^position with the international, monetary fund aad flCCs
tEese l g a ^ " flX B g g*
te^a?i/he <only
- way y*»» rnji finance expanded trade^is to increase
f countries around the world are unwilling to hold
/-dMi^,-^14 1
dollars for whatever reason,(and there is no other^currency.close to as in terms of
those reserves somewhxpg <
may1rrt^nlitfrtt/ » then t f t g T f f i m r r
important t.o reduce^
gold Qess^bte»g*e^&e.
So it became
eliiM.ttfl.te the dependence upon gold as the source of additional
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pnd we. did fcha»t this spring when the monetary valwte -e>£
•Ubut
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gold» imliiili ii bl ill lliiil^riin \1<>~l1rTTTi ■iinioihh m was cut ioose. The London gold
r\
pool
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the market maintained by the big central banks to buy and sell gold
under any circumstances at thirty-five dollars an ounce.*was closed.
k>-<X?£y tk~'
TketsflHLs. a market ffegcgBjfccb
Uuy grr M
b u y -it
As
anrI a n y n u p
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that vfloQtw.fu^-^nyena^aiL,
-j +. > a a S U ffliP g t.Vi«>-i.jg-c^mafcgyL--pfiT»m-i
Thato t'
he go oa^3^4~£ca4»~«ajgtoe^
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The central banks have said "we're not going to buy anymore gold*-we don't need any".
■
Su ml 11 gr*?TT?t girhig h
^T h ato xfc p r
W ----e
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to rely
on a new credit device tfef»toto» being created through the International ftbnetar^
rund and tlint will come into being sometime in 69 if everything goes well.
There are
a lot of safeguards attached to ^ a a i ^ d^^aesgladu a x~ir .raf built in discipline,b<
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governments have to be disciplined just like any other borrower. Yov^kssama^ permitLu^
g&j&jtmment to borrow without having to answer to gomobody anymore 'than you can permit
one of your own borrowers in the PCA unrestricted use of credit.
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jjr^ftnne they'll always use it badly^^its /unfortunate but<ifcss»» and our government
is like any'jpthfti"'-g0ve»nmont-3.n tbat^yegpectj^go wi are appawitffy in a position
tf* where other countries are putting a lot of pressure on us to get our house in order^
to be met.Qx-ra*'fror it
intern at i oiirI—
JasL
r ^■ggi-cj^Li^dxfeecial drav/ing^ights
ting
sctbs '!!•
ojjj#jfc»aWW#»%o bu
the real
^erk will be
mm*&m get our balance of payments as equalibrijim jjfklti we can get
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n d of a good part of our deficit^ b a a a S P ^ i !SWi,"^^
it4^ just like the borrower
going into a bank and promising to do better next year.
, page 9
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that's a pretty old record and unless
can prove it^unless ultimately
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<&&& can pay off debt through profit , which in the international scene is net to
selling more than you buy g ^U nitiuj, 1■ymwni1
vsr m 11
'fr1wfa.there is no way
a collapse of yiauy^surrency and bfeert jcppttgs— fep " -■.gfery «g^
S(
tr3SS5.
We have seen it happen to the British.
hold back
,as the United
If v;e^B<^gp£&,tfo^that, if we
get our balance of payments under control,
get
f
imnfmni
qmjc
then the two price system will go by the board a»eUa.t ■a ama awfnl ^y-*,c±trge''~To‘''TKa^ a
fr>w we^te&~«gq^1?YoirTtt? ui11 ^fc}‘~Ti'f,~'g,gIri r ^y ^I±m» -yj.
j
— f£>-
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gan^teftow when we separated theae»market^we bwA»lfc a thermometer -^P“^ ^ E 3 T the
emperature of tha- aaotignal ooap^8i'b4mx.,iijil
fi»the worljl,
If people get unhappy and
uneasy about the future those people who <an« a*& gold^whethei1 they be Arabian oil
sheiks or vihaphe¥ ^ « ^ e ^ \t9 t'hfr grQ Qt .ind
tilrjf jar ■
j
''"'tId . WMii. ¥w*.
start getting out of money and into ,gold.aajd ihe laws of supply and
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demand start functioning and y**» graa thmt prices go' upt amet we watched it in a period
of about six days go from $39 to $^3-60.
It faedc cm ito»If«
A li
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hystSTrtsr
Those of you who remember bank runs know well the kind of attitude that developps
when y^u^get unespy about y««r money.
So the real test, the only way its going to
run^ this "TOUllli3
get settled is wf the U. S ^pJafta.auao of our-aisc
somewhat more efficiently and somewhat more sanely than we have been doing the last
three years.
That means getting rid of Vietnam and doing something about our balance
of payment.
A tax increase along with monetary restraint will do it because its going to siphon
yyVVSoff money. It isn't going to hurt, ranchers generally very much^because your income
taxes aren't all that bad.
I wish for your sakes they were higher and that you
really had a reason to scream about the proposed surtax:.
to
f *i fiJSSfl'1%'
atigi.'gg^SQ^c
k
in increase income t
you're
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Q - This balance of payment between nations —
If something doesn't happen
s
-
there is a lot I don't understand
about it because it seems that almost all the countries of the world are running
a minus balance of payments.
Is this due to the fact that American corporations
all over the world are sending roughly %k billion in profits back to the
United States?
Are we
running as true a deficit as we think?
A - No, there are countries that aye rwiffw^ig surplus. West Germany for example, Italy.
Q - Would it balance out?
)
A - Yes, its double entry bookkeeping.
If one country has a deficit antT someone
else has a surpluspit works very precisely a&ek*he.s has been a hard lesson for
\
foreign central bankers in Western Europe to learn.
One of the interesting things
that has happened^'one of the things tifett I find very encouraging is the fact
that the central banks of the free worldygflact
n.Bagsiai_.
recognize that if any one of them gets into trouble they are all in trouble.
Nobody can afford a fire.
They have got to stay together.
Historically it has
k
been the opposite. If we practice fiscal restraint in this country ^?nd-mon»tar.
yJ
r\
r«sLT"iint so that our money rates started to go up and .money started to flow out
of Western Europe into the United States then tiwpy would 4
Q
In a sense you have to include money as a commodity^
A - Yes.
c'
Q - Is this DeGaullepjeetelerimT i/J JtP,
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..A But— any; you uuc llii.lL'.iTT^^TirT'oithe
{
can’t get too much out of the trouble the General is having^simply because
~rigfot now, is a,jaajst>ai»-4€i-ELd of aatisfaa^ O Mi ■
'«ndra0>Hfe' of
J
-tfeat again
a^rritieatg
..._ these
.
c±deatfijf. they come— .*,
U*4^S
>*'*"* UrC*.3
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A-*-*—'
feT
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A- w - - ~ - w j * . . < L - » — ^.Kw.1.
The Kennedy round which some of you may know about did the most to encourage free
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trade around the world, to lower tariff barriers.
30 .
Tttaab becomes effective June
At the same time there has been roughly a 10$ increase in the cost of labor
in France.
So on the.one hand France is going to be less competitive in export
market^’at the same time their tariff barriers which traditionally have protected
them are being lowered so goods are going to be able to move in and compete.
-Th^-^nl y pi pry
1rhi r teasfrHH 9»eit
don’t -BHink we reallTlTT3"To
3—^0 ujJLh ri^ri ^iil
hedu!e
.
Q - I think I read somewhere where the present frank was fully protected by gold.
j7
If that is true, why did it get into trouble in the recent crisis.
A -
it is not fully protected by gold.
The number of coipti’ies who are on
a gold standard, pre very few^South Africa, Switzer 1 and^^ss?^^
France r-TMnr4-—
— - suspend#*^ the convertability of their francs.
.
That
One of the lucky things for them was that the banks
^9o nobody.could go to the banks and get their money out and go
struck
apntUflg jUi-rrk-r- thiiir.fTftjrT--J»ias, a religious holiday
to Zurick,and buy gold.
for those* people who weren’t afaw aolc over that particular weekend and then th^rtr''
toh the annual convention of t h e ^ gold dealers 11(
iffiriiriiirn rrf% nrr
the south of France t
Any p&per money which is nothing but a liability to the government j^-^we think
of money still sometimes in terms of the silver dollar, but money is nothing
but a commodity*
You get into terms of banker talk and dejrtJsit
his liability accottnt.
to
Well among government outstanding dollars are thought of
as short term liabilities^
That's fine, they are a<*omises to pay.
you think the promise is goin^sto get delivered*
As long as
But there are so many countries
of the world where people have hacKthese premises repudiated three and four times
in their life times.
^
/
\
An architect we have got doing sgxte work for\us at the bank in Minneapolis is a
Latvian.
Gunar is ^6 ye^rs old and he has lived through
three total financial col^fses in his life time,
came in; the Latvian rijpney was no good.
*n Latvia when the Russians
Russians wenrsthrough one total
revaluation of theij< occupational currency so that got wipfcd out again.
He
migrated to Germany after the second world war the ruples or whatever he took
with him were-- no good then.
Q
This is the real world for the Greeks ,NArab s.
What extent and in what peculiar way do these so called Euro-dollars play in the
common market?
A - What has happened has been that we have come to really one world, i^terjsg of
£az*V»
<-* L-L-t-W-t C-v
business-; ^to a substantial degree in terms of agriculture. Certainly
tTrrrr
of money^^Suro-dollars are simply U. S. Dollars which have short-term liability
that are held overseas outside the continental United States.
They are held
by foreigh Branches of U. S. banks, h&jed by U. S. Corporations tfeafc— re overseasj
Tor \
Id by investors or business houses
others countries. There are roughly eighteen billion dollars.
t
<• ^.4^ d—v*-C-. A f t ti'T'vijfi
J-'f »
Qna of i
tehci"'fehj«gg'%hgfr"hq.p hapjpeneeM le-that (&h the U. S. banking system has been
put under pressure ‘Cissy have had to become very resourceful.
^
h i
L*t. £
J
The big banks
J
of the United States are extremely competitive! ^^Fliey are djmtMm* Ip. world money
markets.
A lot of these Euro-dollars have come home simply because of the
interest ra.tes.
Y^ t t T f ,
has to maintain rejjcvpyjij W±bti
r
«u
^
Reserve if they aj*e-"a menber of t h e a n j a
LThex_
all
also have -t-er"maintainJlefD.I.C . insurance.
.*
Euro-dollars numb b g w frlnua rn^fs so. when you look at the interest rates on
$3o*ii&s»4 i±gke®«.
C<Li-vi
to ^y =Lt».
is
n im p ly h ^ s n s f t th<? I?. ■
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.
aax£Bl ____
p*<f^£~v- t.
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ftfan a f f q xuL
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o ^ igaufiai 'pres^rpg^ma a-'iut’i
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t<---- T A x . * 7
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You have got to put yourself in the position though of a Frenchman or German
or Italian who sees General Motors come to his country.
A corporation the
annual sales let's say are half the gross national product of the county with
enormous credit demanfc and we won't let general motors take U. S. dollars from
the U. S. to wherever they are establishing their new plant, so they borrow the
money over there in the Euro-dollar market or they raise money from the nationals
of that country and this produces substantial interest.
One of the real reasons
that DeGaulle was so unhappy and yet that is simply the way it is, U. S.
Corporations are dealing in world markets. U. S. Banks are in world markets.
Q - All this carries a rather heavy and ominous inference that we are on some sort
of brink —
general trouble.
In view of what you have told us,
if I am correct, 29* August, 1966, precisely what did happen or did not happen
that nearly precipitated into a chaotic condition?
A - What happened was simply that the money market dried up.
Its just like what
happenes when the well runs out of water and if it's a water lubriciated pump,
the pump freezes up and zing, you have no more pump.
that particular date.
You couldn't sell a money security because nobody would
buy it.
Q - What did the Federal Reserve do?
A - We pumped reserves into the market very quickly.
Q - Are you in a position to do this again?
A - Yes.
Q - Is it about to happen again?
This is what happened on
A - No.
We refer to this as the apostolic syndrome, world is coming to end.
I think of a conversation I had with Bill Martin last week.
back from Stockholm.
in the Artie Circle.
We had just gotten
He had taken a break over a weekend, he had never been
He had heard about the midnight sun. So he went up and
he came back with a feeling that the world wasn't going to come to an end after
all.
We are in for a tough time.
been a very difficult period.
We have been through a tough time.
It has
It is going to continue this way.
On the plus side though is the extraordinary level of cooperation that has
developed among central banks of the world, the recognition that they are
in the boat together.
Monetary authorities are working very closely together.
The real joker though is how quickly Congress acts. I think a tax increase
will pass.
It will come about.
Its going to be late and its not too late.
Are you saying sir that possibly with basic switches and basic complexities
occuring that you think Congress will pass a tax increase?
Are you saying in
effect that the built-in image, what we like to identify with the change in
monetary system
Vietnam
that they would work if the politicians would let them work.
Yes I think I am saying that to you.
awfully frightened people.
This is a world now where there are some
The real short fall has come in translating this
into effective national action in a democracy.
yet but we are working on it.
We haven't found the patterns
In this country we have really made strides.
Q - Do you have any cooperation from the communist nations in the world stability
as far as finances are concerned?
A - This is just an entirely personal observation, but the Russians recognize that
they have as much to lose as anyone by a collapse in the international monetary
system; for example, they laid off the pound.
If France had behaved anywhere
near as appropriately as Russia, it would have been an awful lot easier.
They stayed out of the gold market. They could really put pressures against
the dollar if they wanted to and it isn't because they love us, it is simply
there are areas which we are not recognizing very well in this country yet
although there is a ground for it, they are very narrow but they are there.
There are areas of self interest that you can rely upon among nations.
Its
M r . Galusha:
We were unable to reconstruct this question.
Unless
you happen to recall it, we will eliminate both the
question and answer.
I
FICB of Spokane
Its the old story some of my best friends are
but
I wouldn't wany my daughter to marry one.
Well I feel that way about Russia.
You don't have to trust them all the way.
But there are certain narrow areas,
like selling wheat.
state.
I almost got lynched in North Dakota which is a curious
Here is a state with a socialist device in a central bank.
The only
state in the union with its own central bank, the Bank of North Dakota with its
own highly profitable billing system.
Yet in other ways it is intensely
conservative.
In the cold war, in the balance of power among nations gold reserves are more
inportant than people because when you fight a war you need goals to finance
it if you have to go outside your boarders to buy material.
And if you have lots
of people, you can afford to spend them before you spend gold.
cold blooded, but thats the way it is.
That may sound
The only way the Russians and the
Chineese finance wheat purchases have been, of course, with gold because no one
wants their money.
By reducing their capacity, their financial reserves,
where it counts we strike a real blow for stability because it will make it a
little less easy to rock the boat.
This did not sell in North Dakota.
Q - Going back to the balance of power, if I understood your statements, from a
general standpoint in any country, when a country has a surplus some other country
must have a deficit.
A - Right.
The size of the deficit isn't as important as the continuation of it.
You know what pressure you fellows are under to show improvement.
The bank
will stay with you as long as you show a motion in the right direction.
You
cannot have equilibrium in a balance of payment because there are too many
accidents in the world that cause a country to get of whack.
But if they
continue, if they are persistent, and the impression gets abroad that the
country is not minding its affairs very well, just like any other creditors
the people that hold the dollar, you know the American flag doesn't mean a
thing to them, they start wondering.
Well if I sell some of my product to the U. S. and accept dollars and there
is a forward contract, that is I am not going to collect on the dollar for
30 days or kO days or 50 days, I am going to do one of three things; I am
either not going to sell at all if I have no confidence unless I am paid in
currency of some other country, I am going to do it with great misgivings and
maybe take it over there myself, or I am going to get a forward contract.
In
other words I am going to sell against dollars to deliver in the future just
like most of you are familiar with wheat.
Most of you are familiar with wheat
where you can buy wheat futures, well you can buy currency futures except pound
sterling, because there is no forward market in the pound.
Q - Do you foresee any lack of credit for financing American agriculture in the
future?
A - Yes I do, but I can't prove it.
our bank.
I am trying to get a research program going in
I talked to Bob Tootell about this.
number of bankers do, the large ones at least.
He shares my concern.
A
I have this uneasy confortable
feeling that the demands of U. S. agriculture over the next 10 years are going
to be very large.
They are going to continue to grow because we are shifting,
even in this part of the country, to intensive agriculture.
This takes more
and more capital input, more equipment, more fencing, more fertilizing, the
changing breeds.
The commercial banking sector is undergoing change at the
same time.
The corresponding banking system is not the outlet it used to be for agricultural
banks simply because they in turn have a new kind of customer.
These international
corporations, large industrial combinations could need enormous sums of money
and they are a lot easier to lend to.
My guess is that there is going to be pressure.
On the other hand, quite
candidly I haven't seen it develop yet for I am sure any one of you would say
we need more money.
But in the sense of slowing up the progress of American
agriculture I don't think credit yet has been that tight.
But now is the time
to start worrying about it and I don't think we are worrying about it enough.
The Farm Credit System is caught up in national monetary policy as one of the
unwilling beneficiaries of the tightening process, you know that up to 1966
the Farm Credit System could get all the money it needed to satisfy its
customers. When I visit with foreign central bankers who really don't know
much about the Farm Credit System, (it has had its light under a bushel basket),
but the marvelously responsive way it works between the money market and
farmer or rancher up to this time.
Because you could always get the money
at a price.
You know this quantity restriction never operated against the PCA customer
assuming he wasn't a nut, and there have been those.
sometimes until after they had lent them the money.
They didn't find out
You are finding restraint
now because the treasury members got to go in for 9 billion dollars.
If we
have a deficit with no tax increase that is $l8-$19 billions of dollars that
has got to get raised along with $12 to $14 billions of state and local money
along with maybe $20 or $25 billions corporate private money and there isn't
that much around.
Now I don't know how you feel in this district, I know that Andy Lampen at
St. Paul bank gets almost incoherent when he thinks about having to knuckle
down to this kind of situation, but my guess is that that pattern will be
established and this is one more reason why I would like to get on with this
study, but the kinds of people to make it are so rare.
There is a shortage
of economists right now along with computer technicians and they are hard to
find.
I can't prove it, I just have this uneasy feeling at the pit of my
stomach.
@FedFRASER