The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
WHAT IS HAPPENING TO THE U.S.
DOLLAR?
ADDRESS BY RQBERT P, MAYO, PRESIDENT,
rEDERAL KESERVE BANK OF CHICAGO
AT THE MEETING OF THE INTERNATIONAL TRADE CLUB OF CHICAGO
1-EBRUARY Y, 19/8
WHEN YOUR CHAIRMAN CALLED ME SOME TIME AGO AND ASKED IF I
WOULD TALK TO YOU ON THE TOPIC nWHAT IS HAPPENING TO THE DOLLAR?u,
I WAS REMINDED OF AN OLD STORY l HEARD ONCE ABOUT MR, MONTAGUE
(~ORMAN, THE LONG-TIME GOVERNOR OF THE BANK OF ENGLAND,
BACK IN
1919, SO THE STORY GOES, MR, NORMAN WAS ATTENDING A MEETING WITH
THE BANKERS OF THE CITY OF LONDON, IT WAS AT THE TIME WHEN, AFTER
MORE THAN A CENTURY DURING WHICH THE BRITISH POUND WAS THE UNDISPUTED, STABLE INTERNATIONAL STANDARD OF VALUE, THE POUND WAS
TAKEN OFF GOLD AND WAS FLUCTUATING WIDELY IN VALUE AGAINST THE
DOLLAR AND OTHER CURRENCIES,
THIS WAS, OBVIOUSLY, A NEW, SHOCKING
EXPERIENCE TO MANY BANKERS IN THE CITY,
THEY BESIEGED MR, NORMAN
WITH COMPLAINTS AND DEMANDED AN EXPLANATION AS TO WHAT WAS HAPPENING
TO STERLING,
MR, NORMAN IS SAID TO HAVE MOUNTED THE PODIUM AND
WITH A SOLEMN
. . VOICE DECLARED:
IS STEADY AS A ROCK,
uGENTLEMEN,
I ASSURE YOU THE POUND
Ir's JUST THOSE BLOODY FOREIGNERS WHO HAVE
LOST CONTROL OF THEIR EXCHANGE RATES,n
TODAY, IN ADDRESSING MYSELF TO THE QUESTION OF nWHAT IS
HAPPENING TO THE DOLLAR?"
I WISH, I COULD GIVE YOU, IN GOOD
CONSCIENCE, A SIMPLE, "AUTHORITATIVE" ANSWER LIKE THAT WITHOUT
BEING FACETIOUS, AS OBVIOUSLY MR, NORMAN WAS,
THE FACT OF THE
MATTER IS THAT THE DAILY FLUCTUATIONS AND LONG-RUN TRENDS IN THE
INTERNATIONAL VALUE OF THE DOLLAR--AND IN THE VALUE OF INDIVIDUAL
CURRENCIES IN TERMS OF THE DOLLAR--ARE THE PRODUCT OF A GREAT
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 2MANY FORCES--SOME ECONOMIC IN ORIGIN, SOME PSYCHOLOGICAL, SOME
BASED OH RATIONAL (AND SOME ON IRRATIONAL) EXPECTATIONS IN
RESPECT TO MOVEM~NTS IN PRICES, INTEREST RATES, FLOWS OF TRADE,
POLITICAL DEVELOPMENTS, BUSINESS PROSPECTS, AND MANY OTHER FACTORS.
IN
SHORT, THE EXCHANGE RATE IS LIKE THE MOVEMENT IN THE TIP OF AN
ICEBERG, THE RESULT OF MOVEMENTS IN THE UNDERLYING MASS TYPICALLY
OBSCURE FROM CLEAR VIEW,
THUS, IN SEARCHING FOR AN ANSWER TO THE
QUESTION POSED BY THE TITLE OF MY TALK, l SHOULD LIKE TO EXPLORE
WITH YOU SOME OF THE UNDERLYING FACTORS IN THE MOVEMENT OF THE
EXCHANGE RATE OF THE DOLLAR, THEIR ORIGINS, AND THEIR FUTURE
TRENDS AS l SEE THEM,
Bur
BEFORE
I
DO THAT, LET'S TAKE A LOOK AT WHAT HAS BEEN
HAPPENING TO THE DOLLAR IN TERMS OF SOME COLD STATISTICS,
LAST
YEAR, THE DOLLAR DEPRECIATED SHARPLY AGAINST SEVERAL MAJOR CURRENCIES,
18 PERCENT IN VALUE RELATIVE TO THE Swiss
FRANC AND JAPANESE YEN, BY ABOUT 11 PERCENT RELATIVE TO THE
GERMAN MARK, AND EY ABOUT 10 PERCENT RELATIVE TO THE BRITISH
IT DROPPED BY ABOUT
POUND,
THESE WERE THE MOVEMENTS THAT ATTRACTED A GREAT DEAL OF
PRESS COVERAGE AND PUBLIC ATTENTION,
HOWEVER, THEY OBSCURED THE
FACT THAT THE DOLLAR REMAINED RELATIVELY STABLE AGAINST SOME
OTHER MAJOR CURRENCIES, AND THAT IT GAINED AGAINST SOME OTHERS,
AS, FOR EXAMPLE, THE CANADIAN DOLLAR,
INDEED, USING A BROADER
AGGREGATE MEASURE OF THE CHANGE IN THE EXCHANGE VALUE OF THE
DOLLAR THAT TAKES INTO CONSIDERATION THE MOVEMENT IN THE EXCHANGE
RATE OF THE DOLLAR IN TERMS OF CURRENCIES OF OUR
15
MAJOR TRADING
PARTNERS WEIGHTED BY THEIR RELATIVE IMPORTANCE, WE FIND THE
DOLLAR HAS DEPRECIATED BY ONLY ABOUT
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
4 1/2
PERCENT OVER THE PAST
- 3YEAR,
THIS, CERTAINLY, HAS NOT BEEN A CATACLYSMIC DEPRECIATION--
AS SOME MARKET OBSERVERS WOULD MAKE US BELIEVE--PARTICULARLY WHEN
IT IS REALIZED THAT EVEN WITH THAT DEPRECIATION THE DOLLAR IS NOW
STILL WORTH MORE IN TERMS OF THOSE
YEARS AGO!
15 CURRENCIES THAN IT WAS FIVE
WITH THAT PERSPECTIVE IN MIND, LET'S LOOK AT THE
UNDERLYING CAUSES OF THESE MOVEMENTS,
[VEN AT THE RISK OF DWELLING ON FACTS THAT WILL BE FAMILAR
TO MOST OF YOU, I THINK A GOOD WAY TO START IS BY EXAMINING SOME
OF THE "FUNDAMENTALSu OF THE SITUATION--THE WORKING OF THE INTERNATIONAL MONETARY SYSTEM THAT PROVIDES THE FRAMEWORK WITHIN WHICH
EXCHANGE RATES ARE GENERALLY ESTABLISHED,
SINCE EARLY
1973, THE FREE WORLD HAS BEEN OPERATING UNDER A
FLOATING RATE SYSTEM,
THIS SYSTEM CAME INTO BEING FOLLOWING THE
COLLAPSE OF BRETTON WOODS IN
1971,
AND AFTER MANY MONTHS OF
FUTILE EFFORTS TO REESTABLISH FIXED EXCHANGE RATES,
PERFECT SYSTEM,
lT IS NOT A
WE HAVE BEEN REMINDED OF THIS REPEATEDLY IN THE
PAST, AND SOME OF THE MOST RECENT DEVELOPMENTS CERTAINLY BEAR
THIS OUT,
Bur I
THINK WE HAVE TO RECOGNIZE THAT THE FIXED EX-
CHANGE RATE SYSTEM HAS PASSED FROM THE WORLD STAGE, AND THE
FLOATING SYSTEM IS VERY PROBABLY HERE TO STAY,
THE MAIN FEATURE OF THE FLOATING EXCHANGE RATE SYSTEM IS, OF
COURSE, THAT THE EXCHANGE RATES OF INDIVIDUAL CURRENCIES ARE
PERMITTED TO MOVE RELATIVELY FREELY IN RESPONSE TO THE FORCES OF
SUPPLY AND DEMAND,
AN IMPORTANT SOURCE OF DEMAND FOR, AND THE
SUPPLY OF, A COUNTRY'S CURRENCY IN A FREE-MARKET ECONOMY IS THE
MYRIAD OF TRANSACTIONS THAT INDIVIDUALS AND CORPORATIONS RESIDING
IN A COUNTRY ENGAGE IN, DAY-IN AND DAV-OUT, WITH RESIDENTS OF
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 4 -
OTHER COUNTRIES,
IN THE CASE OF THE U.S. DOLLAR, FOREIGNERS WHO
BUY OUR PRODUCTS, SERVICES, AND OUR SECURITIES NEED DOLLARS TO
MAKE PAYMENTS TO US: THEY REPRESENT A SOURCE OF DEMAND FOR DOLLARS
ON THE FOREIGN EXCHANGE MARKETS,
u
Is I
ON THE OTHER SIDE, THERE ARE
RES I DENTS WHO PURCHASE FOREIGN GOODS
I
SERVICES, ltlVESTMENTS,
AND SECURITIES, AND PAY FOR THEM IN DOLLARS; THEY ARE A SOURCE OF
SUPPLY OF DOLLARS ON THE FOREIGN EXCHANGE MARKETS,
OTHER SOURCES OF SUPPLY AND DEMAND DERIVE FROM THE SPECIAL
POSITION OF THE DOLLAR IN INTERNATIONAL FINANCE,
THE
HAS BEEN FOR MANY YEARS AN "INTERNATIONAL CURRENCY,"
U.S.
DOLLAR
IT HAS BEEN
USED AS A CURRENCY OF SETTLEMENTS OF TRANSACTIONS AMONG MANY
COUNTRIES OUTSIDE THE UNITED STATES AND AS AN OFFICIAL RESERVE
ASSET,
THIS ROLE HAS LED TO A LARGE DEMAND ON THE PART OF OFFICIAL
INSTITUTIONS, AS WELL AS PRIVATE INDIVIDUALS AND CORPORATIONS
ABROAD, FOR DOLLARS TO BE HELD FOR TRANSACTIONS PURPOSES AS WELL
AS A STOREHOUSE OF VALUE,
THE EXISTENCE OF THE $200 BILLION
LURODOLLAR MARKET--WHERE DOLLARS ARE HELD, LENT, AND BORROWED FOR
A VARIETY OF PURPOSES--IS ONE MANIFESTATION OF THE SCOPE OF THAT
DEMAND,
THE
60 OR SO BILLION DOLLARS HELD BY THE FOREIGN OFFICIAL
INSTITUTIONS IS ANOTHER,
THIS FOREIGN DEMAND FOR DOLLARS HAS
BEEN MOTIVATED BY MARKET--ORIENTED CONSIDERATIONS, BUT ALSO EY
PSYCHOLOGICAL, POLITICAL, AND EXPECTATIONAL FACTORS,
THE RE-
SULTING FLUCTUATION IN uHOARDING" AND nDISHOARDING" OF PRIVATELY
HELD DOLLARS ABROAD HAS, ON OCCASION, BEEN AN IMPORTANT ELEMENT
INFLUENCING THE SUPPLY OF, AND THE DEMAND FOR, DOLLARS ON THE
FOREIGN EXCHANGE MARKETS--AND THUS THE MOVEMENTS OF THE EXCHANGE
RATE OF THE DOLLAR IN TERMS OF OTHER CURRENCIES,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 5So MUCH, THEN, FOR THE "BASICS" OF THE SITUATION,
LET ME
NOW TRY TO PUT SOME "MEAT" ON THIS BASIC SKELETON BY TRACING SOME
OF THE SOURCES OF THE SUPPLY OF AND DEMAND FOR DOLLARS AS THEY
HAVE EMERGED IN THE REAL WORLD AROUND US,
OVER THE PAST THREE YEARS, WE EXPERIENCED THE DEVELOPMENT OF
A MAJOR IMBALANCE IN OUR INTERNATIONAL ACCOUNTS, AS OUR TRADE
ACCOUNT SHIFTED FROM A $9 BILLION SURPLUS IN
1975 TO A DEFICIT OF
$9 BILLION IN 1976, AND TO MORE THAN A $31 BILLION DEFICIT IN
1977
ON THE BALANCE-OF-PAYMENTS BASIS, THIS DEFICIT IN TRADE IN
GOODS WAS PARTIALLY OFFSET BY OUR TRADE IN SERVICES (WHICH INCLUDES
RETURN ON OUR INVESTMENT ABROAD) BUT IT STILL LEFT US WITH SOME
$13 BILLION DEFICIT ON THE SO-CALLED CURRENT ACCOUNT, TRANSLATED
INTO SUPPLY AND DEMAND RELATIONSHIP, THIS MEANT THAT ~IE HAVE
SUPPLIED
$18 BILLION MORE TO THE FOREIGN EXCHANGE MARKETS THROUGH
PAYMENTS FOR THESE TRANSACTIONS, WHICH WAS DEMANDED BY FOREIGNERS
TO PAY FOR SIMILAR TRANSACTIONS ENGAGED IN BY THEM,
THE TRADE
DEFICIT THUS REPRESENTED ONE IMPORTANT KNOWN ELEMENT OF THE
EXCESS SUPPLY THAT WAS EXPERIENCED BY THE EXCHANGE MARKETS,
WHAT
HAVE BEEN THE UNDERLYING CAUSES OF THAT DEFICIT, AND HOW CAN WE
DEAL ~I I TH THEM?
lN
OVERALL TERMS, THE UNDERLYING CAUSE OF OUR BURGEONING
TRADE DEFICIT HAS BEEN A FASTER GRO~ITH IN OUR IMPORTS THAN IN OUR
EXPORTS: WHILE OUR IMPORTS WERE UP BY ALMOST
OUR EXPORTS INCREASED BY LESS THAN 5 PERCENT,
22
PERCENT IN
1977,
THIS RAPID RATE OF
GROWTH IN IMPORTS WAS PARTICULARLY KEENLY FELT IN CERTAIN SECTORS
OF OUR INDUSTRY AS FOREIGN PRODUCTS SUCH AS STEEL, SHOES, TELEVISION SETS, AND CARS MADE DEEPER INROADS INTO OUR DOMESTIC
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 6 -
MARKETS,
1\s A RESULT, WE HAVE WITNESSED A GROWING PRESSURE FOR
IMPORT RESTRICTIONS AS A MEANS OF SOLVING THE PROBLEMS OF THE
AFFECTED I lmUSTR I ES, AS HELL AS OF OUR GROW I NG DEFICIT,
OUR
GOVERNMENT USED AND IS USING EXISTING CHANNELS DEVELOPED THROUGH
U.S.
LAWS AND INTERNATIONAL TREATIES TO DEAL WITH LEGITIMATE
COMPLAINTS OF INDIVIDUAL INDUSTRIES AGAINST UNFAIR FOREIGN COMPETITION,
Dur
WE MUST NOT PERMIT OURSELVES TO ACT UNILATERALLY
IN REGARD TO OUR IMPORT PROBLEMS BY THE IMPOSITION OF ARBITRARY
IMPORT RESTRICTIONS!
MEASURES!
FEW, IF ANY, NATIONS WOULD TOLERATE SUCH
r~KE NO MISTAKE,
INVITES MORE PROTECTIONISM.
THEY WOULD RETALIATE; PROTECTIONISM
AND THE SPREAD OF IMPORT RESTRIC-
TIONS THAT WOULD FOLLOW WOULD DO A GREAT DAMAGE TO THE
U,S.
ECONOMY AS WELL AS TO OUR WORLDWIDE NATIONAL INTERESTS!
IF WE
VJANT TO FIND A LASTING SOLUTION TO OUR TRADE PROBLEMS, ~fE MUST
LOOK DEEPER INTO THE UNDERLYING CAUSES AND SEEK THE SOLUTIONS
THERE,
PROBABLY THE MOST IMPORTANT UNDERLYING CAUSE OF THE RAPID
EXPANSION IN OUR IMPORTS RELATIVE TO OUR EXPORTS HAS BEEN THE
RECENT WIDE VARIATION AMONG THE FREE WORLD NATIONS IN ECONOMIC
PERFORMANCE,
OUR ECONOMY HAS BEEN HEALTHIER, AND GROWING CONSIDERABLY
FASTER, THAN THE ECONOMIES OF OUR MAJOR TRADING PARTNERS TAKEN AS
A GROUP,
THIS EXPANDING
U.S.
ECONOMY HAS BEEN DRAWING IN IMPORTS
AT A MORE RAPID CLIP THAN HAS BEEN THE RATE OF GROWTH IN THE
DEMAND FOR OUR PRODUCTS IN THE SLUGGISH ECONOMIES ABROAD,
THERE
ARE TWO POSSIBLE REMEDIES FOR THE IMBALANCE IN OUR TRADE ARISING
FROM THIS SOURCE,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
WE COULD SLOW DOWN OUR IMPORTS BY SLOWING DOWN
- 7 -
OUR ECONOMY, OR, WE COULD HOPE FOR ACCELERATION OF OUR EXPORTS AS
A BY-PRODUCT OF IMPROVEMENT IN ECONOMIC GROWTH IN MAJOR INDUSTRIAL
COUNTRIES ABROAD,
THE FIRST ALTERNATIVE WE CANNOT ACCEPT,
WE NEED MORE GROWTH,
NOT LESS, SO THAT WE CAN MAKE FURTHER INROADS ON UNACCEPTABLY
HIGH LEVELS OF UNEMPLOYMENT, AND SO THAT WE CAN CONTINUE TO
PROVIDE STlf1ULUS TO ECONOMIC EXPANSION WORLDWIDE BY OUR OWN
ECONOMIC ADVANCES,
OBVIOUSLY, THE SECOND ALTERNATIVE IS PREFERABLE,
FROM OURS AS WELL AS THE WORLD'S VIEWPOINT,
WITH THIS IN MIND,
OUR GOVERNMENT HAS COfJSISTENTLY USED INTERNATIONAL MEETINGS, SUCH
AS THE ECONOMIC SUMMIT OF THE HEADS OF MAJOR STATES LAST YEAR,
THE MINISTERIAL MEETINGS OF THE ORGANIZATION FOR [cONOMIC COOPERATION AND DEVELOPMENT, AND MANY OTHER FORMAL AND INFORMAL CHANNELS,
TO NUDGE OUR FRIENDS ABROAD INTO ECONOMIC EXPANSIONARY ACTION
THAT WOULD BENEFIT THEM IN REDUCING THEIR RECORD-HIGH UNEMPLOYMENT,
BENEFIT THE DEVELOPING COUNTRIES OF THE WORLD BY PROVIDING FURTHER
STIMULUS TO THEIR ECONOMIC GROWTH, AND BENEFIT US EV IMPROVING
MARKETS FOR OUR EXPORTS,
I HOPE OUR VOICES WILL BE HEEDED--FOR
OUR COMMON GOOD--AND THAT IN THE COMING YEAR, WE SHALL SEE SOME
IMPROVEMENT IN OUR TRADE ACCOUNT EMINATING FROM THIS SOURCE,
ANOTHER UNDERLYING CAUSE OF OUR RAPID GROWTH IN IMPORTS--AND
OF OUR TRADE DEFICIT--HAS BEEN OUR VORACIOUS APPETITE FOR IMPORTED
OIL,
LAST YEAR, OUR OIL IMPORT BILL CAME TO ABOUT $l{5 BIL.LION--
UP FROM
$36
RECENTLY AS
BILLION IN
1972,
1976,
TRUE, SOME
$5 BILLION AS
1972-1977 INCREASE
AND UP FROM LESS THAN
80
PERCENT OF THE
IS ACCOUNTED FOR BY HIGHER PRICES RESULTING FROM THE ACTION BY
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-
n
0
-
0Pt.C IN 1973, .bUT EE THAT AS IT MAY, \"JE WERE STUCK \\'ITH A tLI5
BILLION OIL EILL IN 1977, THIS IS A FORMIDABLE FIGURE--EVEN TO
Ah OLD
G,S,
bUDGET DIRECTOR LIKE MYSELF, THAT FIGURE HAS BECOME A
MILLSTO~E AROUND THE NECK OF THE FLOATING DOLLAR! WHAT CAN BE
DONE?
IN THE FINAL ANALYSIS, WE MUST TAKE OUR OWN ENERGY BULL BY
THE HORNS!
UP[C,
WE MAY RESENT THE CARTEL PRICING POLICIES OF THE
WE MAY AGONIZE OVER THE DISRUPTION THAT THE SUDDEN SHIFT
IN PRICES OF ENERGY IS CAUSING TO OUR CHEAP ENERGY-ORIENTED
ECONOMY AND OUR SOCIETY, WE CAN ARGUE, FOR A TIME AT LEAST, OVER
THE ENVIRONMENTAL IMPACT OF INCREASED USAGE OF ALTERNATIVE SOURCES
OF ENERGY,
bUT WE CANNOT CONTINUE TO LIVE IN A FOOL'S PARADISE
WHERE, FOR EXAMPLE, THE RfAL. PRICE OF GASOLINE IS
now
ABOUT
lf
PERCENT LO~iER, AND THAT OF NATURAL GAS AND ELECTRIC I TY IS SOME lJLt
PERCENT LOWER, THAN IT WAS SOME
30 YEARS AGO, WE NEED AN EFFECTIVE
iJATIONAL ENERGY POLICY SO THAT ~·IE CAN MAKE DECISIVE PROGRESS
TOWARD DIMINISHING OUR RELIANCE ON IMPORTED SOURCES OF ENERGY,
HOWEVER, IN LOOKING AT OUR OIL-RELATED DEFICIT,
LOSE SIGHT OF CERTAIN STARK REALITIES,
~JE
MUST NOT
OUR HEAVY RELIANCE ON OIL
AS THE MAJOR SOURCE OF ENERGY IS THE PRODUCT OF MANY, MANY YEARS
OF EVOLUTION, IT WILL TAKE MANY YEARS TO REVERSE THIS TREND,
IT
WILL TAKE MANY YEARS TO DEVELOP--AND INTEGRATE INTO OUR COMPLEX
ECONOMY--ALTERNATIVE SOURCES OF ENERGY,
THUS, WE CANNOT REALIS-
TICALLY EXPECT TO CUT BACK OUR OIL IMPORTS SIGNIFICANTLY IN THE
NEAR FUTURE,
i~OR IS IT ABSOLUTELY ESSEtfflAL IF THE "PRICE
11
WE
MUST PAY IS A SEVERE DISRUPTION IN OUR ECONOMIC GROWTH AND GREATER
UNEMPLOYMENT,
THERE IS ANOTHER DIMENSION TO THE OIL ISSUE AS IT RELATES TO
OUR TRADE DEFICIT,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
IT IS THE MULTILATERAL NATURE OF OUR INTER-
-
Q
.:J
i~ATIONAL TRADE--BOTH IN TERMS OF SPECIFIC COMMODITIES, AND IN
GOCGRAPHIC TERMS,
IN OTHER WORDS, WE SHOULD NOT EXPECT TO
BALANCE OUR TRADE IN EVERY COMMODITY OR WITH EACH OF OUR TRADING
PARTNERS!
FOR
EXAMPLE, OF THE TOTAL ~t.:S BILLION OIL-IMPORT BILL
INCURRED LAST YEAR,
FROM THE
flEXICO),
OPEC
THIS
$34 BILLION REPRESENTED OUR BILATERAL IMPORTS
COUNTRIES (THE REST WAS LARGELY FROM CANADA AND
~34
BILLION WAS PARTIALLY OFFSET BY OUR
BILLION SURPLUS OF NON-OIL EXPORTS TO THEM,
$14
IT IS THE BASIC
PROPOSITIOi~ ON WHICH ALL. INTERNATIONAL TRADE IS PREDICATED THAT
EACH COUNTRY SPECIALIZES IN THE PRODUCTION AND EXPORT OF THOSE
COMMODITIES IN WlilCH IT HAS A COMPARATIVE ECONOMIC ADVANTAGE,
FURTHERMORE, IT IS IN THE VERY NATURE OF THE WORLD'S MULTILATERAL
TRADE RELATIONSHIP T•iAT EACH COUNTRY'S DEFICIT IN TRADE WITH THE
UNITED STATES IS OFTEN MERELY A COUNTERPART OF ITS SURPLUS WITH
ANOTHER AREA OR AREAS,
OIL TRADE WITH THE
OPEC
IN THAT VEIN, OUR BILATERAL DEFICIT IN
NATIONS MAY BE VIEWED AS BEING TO SOME
DEGREE COVERED BY OUR BILATERAL TRADE SURPLUS WITH THE EUROPEAN
ECONOMIC COMMODITY NATIONS WHO, IN TURN, ARE SELLING THEIR GOODS
TO THE
OPLC
COUNTRIES,
IN THE FINAL ANALYSIS, A VIABLE TRADE OF
ANY COUNTRY IS PREDICATED ON THE COMPETITIVENESS OF ITS GOODS ON
THE WORLD MARKETS!
AND THIS BRINGS ME TO YET ANOTHER UNDERLYING CAUSE OF OUR
DEFICIT--THE COMPETITIVENESS OF
U.S.
GOODS ON THE WORLD MARKETS,
COMPETITIVENESS OF ANY COUNTRY'S GOODS ON THE WORLD MARKETS IS
GENERALLY DETERMINED BY THE QUALITY OF ITS PRODUCTS, DELIVERY
PROMPTNESS, AND FOLLOW-UP SERVICES--BUT ABOVE ALL, IT IS DETER-
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 10 MINED BY THE PRICES OF ITS PRODUCTS,
THE FINAL PRICES OF A
COUNTRY'S PRODUCTS ON THE WORLD MARKETS AS THEY CONFRONT FOREIGN
BUYERS OF THESE PRODUCTS ARE DETERMINED THROUGH A TWO-TIER
PROCESS, THE FIRST TIER RELATES TO THE RATE OF PRICE CHANGES--THE
RATE OF INFLATION--WHICH DETERMINES THE PRICES OF THE COUNTRY'S
GOODS IN ITS OWN CURRENCY,
NEXT, IT IS THE MOVEMENT OF EXCHANGE
kATES THROUGH WHICH SPECIFIC DOMESTIC PRICES ARE "TRANSLATED"
INTO SPECIFIC INTERNATIONAL PRICES,
THIS CONSTITUTES THE SECOND
TIER THROUGH WHICH INTERNATIONAL COMPETITIVENESS IS BEING DETERMINED,
LET'S TAKE A LOOK AT THE SITUATION AS IT HAS UNFOLDED DURING
THE PAST SEVERAL YEARS,
ON THE nFIRST TIER," THE DOMESTIC WHOLE-
SALE PRICES OF MANUFACTURED GOODS (PRICES GENERALLY MOST RELEVANT
IN INTERNATIONAL TRADE) ROSE BY ALMOST
STATES, IN GERMANY BY
3
7
PERCENT IN THE UNITED
PERCENT, IN JAPAN BY
~WITZERLAND THEY ACTUALLY DECLINED BY ALMOST
THE END OF
1976
AND LATE
1977.
2
1
PERCENT, AND IN
PERCENT BETWEEN
OBVIOUSLY, OUR COMPETITIVE POSITION
AGAINST THESE COUNTRIES IN TERMS OF DOMESTIC PRICES ERODED DURING
THE YEAR,
THE MOVEMENTS IN THE EXCHANGE RATES OF THESE CURRENCIES
RELATIVE TO THE DOLLAR--THE SECOND-TIER PROCESS--MAY BE VIEWED AS
COMPENSATING FOR THE TRENDS ON THE "FIRST TIER," IF WE WEIGH THE
CHANGES SINCE THE ESTABLISHMENT OF THE FLOATING SYSTEM IN FEBRUARY
1973
IN THE EXCHANGE RATE OF A COUNTRY WITH RESPECT TO THE
CURRENCIES OF ITS
14
MOST IMPORTANT TRADING PARTNERS (EXCLUDING
CANADA) BY THE VOLUME OF THE TRADE, AND ADJUST THESE WEIGHTED
CHANGES FOR THE INFLATION IN PRICES OF MANUFACTURED GOODS EXPERIENCED DOMESTICALLY BY THESE COUNTRIES, WE COME TO A CONCLUSION
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 11 THAT MAY BE SURPRISING TO MANY:
hY ABOUT
10
PERCENT IN
1977
AGAINST THE CURRENCIES OF A GROUP OF
NATIONS THAT INCLUDED JAPAN AND
THE END OF
1977,
ALTHOUGH THE DOLLAR DEPRECIATED
13
MAJOR EUROPEAN COUNTRIES AT
THE U,S, COMPETITIVE POSITION (AS DETERMINED BY
14 MAJOR
IN 1973!
THE "TWO-TIER" PROCESS) IN RESPECT TO ITS
WAS ALMOST PRECISELY THE SAME AS IT WAS
TRADING PARTNERS
To SUM UP, OUR CURRENT DEFICIT MAY HAVE BEEN CAUSED AT LEAST
IN PART BY OUR RELATIVE LOSS OF COMPETITIVENESS DURING THE EARLIER
PART OF THE
1973-77
PERIOD, AND THE OBSERVED MOVEMENTS IN THE
EXCHANGE RATE OF THE DOLLAR RELATIVE TO MAJOR CURRENCIES HAS BEEN
A PART OF THE LAGGED PROCESS BY WHICH MARKETS HAVE TENDED TO
REESTABLISH THAT COMPETITIVENESS,
So
MUCH FOR THE PROBLEMS OF THE DECLINING DOLLAR AS THEY
RELATE TO THE DEVELOPMENTS IN OUR TRADE ACCOUNT,
LET ME NOW TURN
TO THE MONEY AND CAPITAL MARKETS,
DATA FOR
1977
ON THE SUPPLY AND DEMAND FOR DOLLARS ON THE
FOREIGN EXCHANGE MARKETS ARISING FROM MONEY AND CAPITAL TRANSACTIONS
BETWEEN THE UNITED STATES AND COUNTRIES ABROAD ARE AVAILABLE ONLY
THROUGH SEPTEMBER, THEY INDICATE THAT THE DEMAND FOR DOLLARS IN
THE CAPITAL ACCOUNT AMOUNTED TO ABOUT $29 BILLION, WHILE THE
SUPPLY OF DOLLARS (ARISING FROM ACQUISITION OF FOREIGN ASSETS AND
INVESTMENTS BY U,S, RESIDENTS) CAME TO ABOUT
$13
BILLION,
THIS,
ON THE SURFACE, WOULD APPEAR TO BE A RATHER "FAVORABLE" CONSTELLATION
OF THE SUPPLY AND DEMAND FORCES,
HOWEVER, A CLOSE LOOK AT THE
FIGURES INDICATES THAT THREE-QUARTERS OF THAT OBSERVED "DEMAND"
FOR DOLLARS WAS ACTUALLY A "RESIDUAL DEMAND," REPRESENTING ACQUISITION OF DOLLARS BY FOREIGN OFFICIAL INSTITUTIONS AS THEY INTERVENED
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 12 IN THE FOREIGN EXCHANGE MARKETS IN THEIR EFFORTS TO MODERATE THE
RISE OF THEIR CURRENCIES RELATIVE TO THE DOLLAR!
PRIVATE FOREIGN
DEMAND FOR DOLLARS APPEARED TO HAVE FALLEN QUITE SHORT OF SUPPLY
IN THE MONEY AND CAPITAL TRANSACTIONS, PARTICULARLY IN THE LAST
FEW MONTHS OF THE YEAR,
IN PART, THE CAUSES OF THIS TREND WERE "ECONOMIC" IN ORIGIN:
IN PART, THEY WERE A REFLECTION OF PREVAILING MARKET PSYCHOLOGY,
ON THE ECONOMIC SIDE, THE TREND REFLECTED CONTINUED EXCESS OF OUR
CORPORATE LONG-TERM INVESTMENT ABROAD OVER FOREIGN INVESTMENTS IN
THE LiNITED STATES--DESPITE ALL THE TALK WE HEAR ABOUT FOREIGNERS
TAKING OVER OUR FARMS, OUR BANKS, AND OUR FACTORIES,
REFLECTED THE ACTIVITIES OF
U,S,
lT ALSO
BANKS AND OTHERS IN ACCOMMO-
DATING DEMAND FOR CREDIT AROUND THE WORLD IN THE FORM OF LOANS
AND PURCHASES OF FOREIGN SECURITIES,
WHAT CAN BE DONE ABOUT THESE FLOWS AS A MEANS OF IMPROVING
THE TRENDS IN THE VALUE OF THE DOLLAR?
FOR THE BENEFIT OF THOSE
OF YOU IN THE AUDIENCE WHO STILL LIVE WITH THE PAINFUL MEMORIES
OF THE "VOLUNTARY FOREIGN CREDIT RESTRAINT PROGRAM," THE "INTEREST
EQUALIZATION TAX," THE "FOREIGN DIRECT INVESTMENT PROGRAM,u AND
OTHER PROGRAMS INSTITUTED TO SHORE UP THE DOLLAR IN THE SIXTIES,
LET ME STATE CATEGORICALLY THAT
I
AM NOT AWARE OF ANYONE IN THE
U,S, GOVERNMENT WHO IS PRESENTLY ADVOCATING OR CONTEMPLATING
ARTIFICIAL SUPPORT OF THE DOLLAR BY IMPOSING RESTRICTIONS ON THE
FLOW OF CAPITAL TO OR FROM THIS COUNTRY!
RECOGNIZES THE VITAL ROLE U.S. BANKS,
U.S.
I THINK EVERYONE TODAY
INDUSTRY, AND
U,S,
INVESTORS PLAY AS INTERMEDIARIES OF INTERNATIONAL FINANCIAL
FLOWS, AND AS SUPPLIERS OF SORELY NEEDED CAPITAL TO THE ECONOMIES
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 13 OF THE WORLD'S FREE NATIONS--DEVELOPED AS WELL AS DEVELOPING,
MOREOVER, ANY RESTRICTIONS ON PRODUCTIVE CAPITAL FLOWS ARE UNNECESSARY
WHEN IT IS RECOGNIZED THAT IT WAS LARGELY THE PRESENCE OF ADVERSE
uPSYCHOLOGICAL" FACTORS IN THE MARKET THAT HAVE BEEN CAUSING THE
RECENT ADVERSE DEVELOPMENTS IN THE INTERNATIONAL MONEY AND CAPITAL
ACCOUNTS,
AVAILABLE DATA SUGGEST THAT IT WAS THE HUGE SHIFTS OF
SHORT-TERM FUNDS, AT TIMES SPECULATIVE IN NATURE, THAT AGGRAVATED
THE DOWNWARD PRESSURE ON THE DOLLAR IN THE FOREIGN EXCHANGE
MARKETS,
THE IMPETUS TOWARD REVERSING THE ADVERSE CAPITAL FLOWS
AFFECTING THE DOLLAR MUST COME FROM IMPROVEMENTS IN THE "PSYCHOLOGY"
OF THE INTERNATIONAL FINANCIAL MARKETS,
WE HAVE TO RESTORE THE
APPARENTLY SHAKEN CONFIDENCE OF FOREIGN INVESTORS--AS WELL AS
U,S,
INVESTORS--IN OUR ABILITY TO REDUCE INFLATIONARY DANGERS AND
TO MANAGE OUR AFFAIRS IN A WAY CONSISTENT WITH OUR LEADERSHIP
POSITION IN THE WORLD ECONOMY,
THERE ARE, OBVIOUSLY, MANY ELEMENTS THAT GO INTO WEAVING
THIS FABRIC OF "MARKET PSYCHOLOGY," AND IT WOULD BE PRESUMPTUOUS
OF ME TO TRY TO UNRAVEL THEM IN THE TIME REMAINING,
LET ME JUST
MENTION A FEW AREAS WHERE POSITIVE ACTION, IN MY JUDGMENT, CAN GO
A LONG WAY,
WE MUST ALL GIVE OUR SUPPORT TO OUR GOVERNMENT
TOWARD RESOLVING NATIONAL POLICY UNCERTAINTIES, AS FOR EXAMPLE IN
RESPECT TO OUR ENERGY AND TAX POLICIES, WE MUST DEMONSTRATE TO
THE REST OF THE WORLD OUR RESOLVE TO FORMULATE RESPONSIBLE ECONOMIC
POLICIES IN RESPECT TO INFLATION AND LONG-TERM ECONOMIC GROWTH,
IMPROVEMENTS IN THESE AREAS WILL, I BELIEVE, CONTRIBUTE SIGNIFICANTLY TO AN IMPROVEMENT IN MARKET PSYCHOLOGY, AND THUS TO
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
IMPROVEMENT IN THE POSITION OF THE DOLLAR INTERNATIONALLY,
IN TRYING TO ANSWER THE QUESTION, "WHAT IS HAPPENING TO THE
U.S.
DOLLAR?"
I
FOCUSED ON A NUMBER OF FACTORS THAT, IN MY
JUDGMENT, HAVE PLAYED AN IMPORTANT ROLE IN THE RECENT DEVELOPMENTS.
THEY WERE WHAT I WOULD CALL FUNDAMENTAL ECONOMIC FACTORS, THE
RESULTS OF COMPLEX ECONOMIC INTERACTIONS WITHIN OUR AREA ECONOMY,
AND OF THE INTERACTION OF OUR ECONOMY ~/ITH THE REST OF THE WORLD-THAT SUBMERGED PART OF THE ICEBERG THAT I REFERRED TO EARLIER,
THERE IS NO EASY ANSWER--AND NO EASY SOLUTION--TO WHAT HAS BEEN
HAPPENING TO THE
THE
U.S.
U.S.
DOLLAR,
AN IMPROVEMENT IN THE POSITION OF
DOLLAR WILL REQUIRE SYSTEMATIC PROGRESS ON MANY FRONTS,
WE ARE ON THE RIGHT ROAD,
OUR ACTIONS AND OUR ECONOMIC POLICIES
ARE EVOLVING WITH THE INTEGRITY OF THE DOLLAR IN MIND,
WE ARE
NOT PRACTICING A POLICY OF "BENIGN NEGLECT" IN RESPECT TO THE
DOLLAR AS SOME OF OUR FRIENDS ABROAD HAVE ACCUSED US JUST BECAUSE
WE HAVE NOT INTERVENED MORE HEAVILY IN THE FOREIGN EXCHANGE
MARKETS!
OUR POLICY OF LIMITED OFFICIAL INTERVENTION HAS PROVED
TO BE VERY CONSTRUCTIVE THUS FAR, PARTICULARLY AS IT HAS TENDED
TO THROW SPECULATORS OFF GUARD,
INTERVENTION IS A MANAGEMENT
STRATEGY, ALBEIT A VERY VALUABLE ONE: IT IS NOT A CURE,
IN BROAD PERSPECTIVE, OUR POLICIES IN RESPECT TO THE DOLLAR
MUST BE GUIDED BY TWO BROAD PRINCIPLES,
ONE SUCH PRINCIPLE
DERIVES FROM OUR EXISTENCE AS A VIABLE MEMBER OF THE TRADING
COMMUNITY OF NATIONS,
THAT VIABILITY IS LARGELY PREDICATED ON
OUR ABILITY TO MAINTAIN A HEALTHY, NONINFLATIONARY ECONOMY, AND
ON OUR ABILITY llTO PAY OUR WAY"--ro SEE TO IT THAT OUR INTERNATIONAL ACCOUNTS ARE KEPT IN A REASONABLE BALANCE,
fJo NATION,
JUST LIKE NO INDIVIDUAL, CAN GO ON SPENDING FOREVER MORE THAN IT
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 15 EARNS!
THE OTHER PRINCIPLE COMPRISES CONSIDERATIONS INVOLVING
THE VIABILITY OF THE ENTIRE WORLD TRADING SYSTEM,
THAT VIABILITY
IS PREDICATED ON THE PROPOSITION THAT ALL TRADING NATIONS MUST
SACRIFICE CERTAIN SELF-SERVING OBJECTIVES FOR THE BENEFITS THEY
DERIVE FROM A FREE INTERNATIONAL EXCHANGE OF GOODS:
NO NATION
CAN EXPECT TO BUILD ECONOMIC BENEFITS FOR ITSELF BY HEAPING
ADVERSITIES ON OTHERS,
As
LONG AS WE, AS WELL AS OTHER NATIONS, ADHERE TO THESE
PRINCIPLES OF NATIONAL AND INTERNATIONAL RESPONSIBILITY,
CONVINCED THAT THE FUTURE OF THE DOLLAR WILL BE SECURE,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
JAM
@FedFRASER