Business roundtable; 12 Of 26

The following program is made possible through a grant from nation's business. This is a business roundtable a program of current coming from leading members of America's business community. Today Howard Jase chairman of the board Michigan National Bank and Roland of the Graduate School of Business Administration Michigan State University will explore the topic the devaluation of the British pound with series host Alfred L. C. Lee Dean of the Graduate School of Business Administration at Michigan State University. Our subject on this session of the Business Roundtable is the recent devaluation of the British currency the pound sterling and its wide repercussions throughout the world with particular attention to its effect on

the United States. This action is the culmination of a violation of a basic economic Tenet over a long period of time. No nation can spend more abroad than it receives. Great Britain for years has spent much more abroad for goods and services than it received. Devaluation is a cut in the official price of a country's currency. For example the British reduced the pounds official value by fourteen point three percent. Formally the pound was worth two dollars an eighty cents in United States money. Now it is worth two dollars and forty cents. The hope of a country devaluing its currency is that their goods sold abroad will be lowered in price. Therefore they will sell more goods and imported goods will cost more in relation to their currency

and its less will be imported into the country. Exports Well then expand imports will be curtailed. Hopefully. The country will earn more and spend less abroad therefore obtaining a favorable balance. Mr. Stoddard how did Great Britain get into the situation where it was necessary for them to take the rather drastic step of devaluating their currency. I think a bit of perspective is necessary when I was a boy it was very simple. A pound was five dollars. And I guess for my grandchildren now the penalty will be two dollars and forty cents. As a result of World War One with its heavy cost in treasure in man in Britain the value after world art to same repetition the enormous cost of treasure and manpower

Britain was again forced to devolve to devalue and then now we're in my own lifetime at least this is the third time that it does happen. Britain also has been a nation that cannot feed itself. It has to import food to live. It can't sustain itself on food and therefore this has been a constant drain on the resources of that great nation. Yes so all of these things have culminated today in a further devaluation which has no history or Dr Robinson or any other aspects of the British devaluation that are important to our discussion tonight as to what brought it about. I think it's fair to point out that it was an event that the British didn't exactly choose while they had been working at trying to do something about their balance of payments problem for some considerable period of time.

But the immediate precipitating circumstances were about as follows that first whereas in the first two quarters of 67 they had had some little improvement. In the third quarter it started it started to look bad but the thing that it precipitated was that a number of countries that had funds in London and had Starling started to withdraw their sterling. This is a little bit like a run on a bank and faced with this the British really didn't have too many choices they had to do something so that the actions should be viewed not as as something voluntarily elected but it was it was an event that was more or less forced on them by by circumstances that were shaping up and have been influenced by all these long run factors. I was just honored as a board chairman of one of our country's largest banks. Did you think that the action that the British took was appropriate to their situation. I'm inclined to believe as Dr. Robinson has pointed out that they had no

alternative. They didn't want to. But I don't know what else under the circumstances was available to them. As I read the recent newspaper articles. There was an attempt made at the last minute to shore up the poem so this step wouldn't have to be taken but apparently it's simply one of those things that had to be done and has been done so it's beyond the theoretical stage now it's an accomplished BEISNER got pushed back which we're now going to have to live with that already. As you know Mr. Stoddard has a very useful point of departure on this because it should be noted that economics and politics can never really be separated and this matter of the of the effort to shore it up by last minute negotiations should be should be spelled out there. There is as you know. This longstanding effort of the British to enter the common market and this is been opposed by specifically

General to go. And one of the terms has been that they should put their house in order and have a viable currency which I might add though I seldom agree with General De Gaulle is one point on which there's there may be a valid foundation but the British simply under the circumstances had had very little room for maneuver. They had to respond and I repeat that that is a part of the run on Sterling that politics as well as economics should be brought into this discussion. Well on the run on Sterling was basically brought about because there are debts abroad far exceeded what they had imports into the countries is basically correct. Well the balance of payments is an extremely complex subject on this program we could get ourselves all snarled up with this can of worms if we should try to untangle it. But. Let me go back a bet on just goodness. The British have had a unfavorable balance of

trade for at least a century and a half. Now. Long before World War 1 they were able to pay for it because they had large investments abroad that produced excellent income and as well they had money coming back they had an idea coming back in. And as far as that goes they established a standard of living based on on this general position. And then after as Mr. Stoddard pointed out after World War 1 there were the problems of adjustment which they didn't quite succeed in doing. Then we had a Great Depression and then we had a war. We've had many events all of which have been separate bits of history. But but the net effect of it is that the British now shorn of much of their foreign investments and practically all of their colonies simply face an adjustment and nobody likes to go through the wringer in that way. Let's just start recognizing as you said that this devaluation is a fact of life economic life for Great Britain and for the world.

Where does this leave them in today's type of modern economy. Do you think that the measure that they have taken is sufficient to remedy their situation. While I think at the moment they've taken the only step open to them. It's difficult to look down the road for anybody. Too far down the road and determine whether this will be lasting or whether they'll be other matters come up that might cause them to have to take action again. You mean action again by evaluating still further. It's always a possibility because England has a big problem peculiar to the very nature of her history overs and it has placed her in a very difficult situation. You could view it this way that the process of devaluation bought some time. But not a lot of time. And so that

the real issue as to how they use this time. And at the present juncture I don't think anybody could reasonably forecast well how do they need to do. What should the country internally do with it was those within their control. This is an extremely difficult and painful bit us. The trouble about it is we may have to make the same sort of description for our own country because we like the British. And really there are only two countries in the world where this situation prevails have a currency that has been widely used by other countries as a monetary reserve and so that. We stand in jeopardy ourselves the trouble about it is I'm trying to give the British advice. Should we be giving advice to ourselves. Let me say this much that I think I think clearly that you have to stop price inflation or at least slow it down. That is that this is one of the things that has to be done. I mean this how are they going to do that. What measures should concrete measures should they take in

Great Britain. They have already taken fairly extreme fiscal and monetary measures. In fact they have done better than we have on that score I think I think that us in fairness to him that's that their problem is greater and that they have made greater efforts. But I think that they simply have to take more massive doses in that regard. I mean higher taxes. That is one of the one of the things that I think that is that is necessary. Don't you feel that it's not too far off that you're become a partner in the Common Market. There isn't much greater than the personality of one man we would say who opposes it. And if she becomes a partner then I'm going to begin to shape up along entirely different lines and they're working today. If I were to give a prescription for Great Britain I think that this is right yes I would like to see Great Britain in the Common Market. And by the way let me add another thing that I'd like as a as a banker of Mr. Stoddard I'd be interested in your view on it. But I have the feeling that the position of the Sterling as a reserve

currency actually has worked to their disadvantage. And I should think that they might welcome rather seeing that this position liquidated because a stands as a constant threat that if they could have a look a little leeway that is if they could establish stable trading with natural trading partners and this is where the Common Market prescription to be useful then they might work out their problems because they did that they are economically a part of York 60 percent of the trade of these countries as well as one another. We have share in it but still the fact remains that they are an economic community. Let's start what do you think Great Britain ought to do now that they've devalued to make this really work. Dr Robinson has said for example that he thinks they've taken pretty strict fiscal and monetary measures including tax or any other aspects what about the labor increases. Well she's going to have to be very careful about that of course the things she wants to accomplish

is to export as much as she can no import is little. This is just got to be done. There's got to be done otherwise there's no point in devaluing and that therefore the standard of living of the people is going to decrease greatly. Well yes and I think that might be their ultimate fate but sometimes things have a way of working out. There are tenacious people there are solid people. Certainly they've demonstrated ability before to go through crisis is that as important as this one. I don't write them off. Well yield to no one in my head. My admiration for that for their Brady said it my my formative years were to hear the story of the battle of Breton and and I don't want to buy anything I say to the dairy gate that my I admire their their personal courage and I might add their personal integrity in these problems. However in the short run as an economist I'm inclined to make a fairly straightforward

affirmation. They will have to cut their standard of living. There are two things. One one of which we have not brought up. One thing we have is that they stand that their imports come to a point that they can't sustain. But the other thing is that their savings rate hasn't been very high and they need capital. They've they've had some but they need more capital. So in the short run the honest fact is as I see it that that they have to face I'm afraid some belt tightening isn't it true that their labor productivity is not very high in Great Britain. Well and if this is one of the reasons some of their goods are relatively high cost types of operations this isn't true of all industries but of many. This is is a very real problem because there are old industries that that are rigid a fied and I might add some of these are the nationalized industries too where they fail to to do the things that are needed to make the capital investments to cut their costs. But this could

slander the British if we if we fail to recognise it in some areas they they have done very well. I repeat that their problem is an extremely difficult problem because anyone that has enjoyed a good standard of living in as matter of fact has contributed a great deal to the world. I believe the British have contributed a great deal to the world that now forced by their geography and forced by by the trend of world politics that is that assuring them of the colonies have to face and economics are transitions. You're right but is that right. DR ROBINSON I think it was Everson who said that all matter is lazy is that there be. And the British now are faced with some hard facts and out of that situation they may find a solution. The bright guy is undoubtedly something that has been overdone in Britain and I hate to say it but maybe the coffee break is going overdone in the United States. We followed him in that respect Tony I just coffee in it. Well let's turn to another

aspect of our subject. One of course very important thing that people all over the world today are looking at is what is going to happen to the American dollar as a result of the British devaluation of their currency. For example some some have been saying that it's only a question of time before the United States is going to have to devalue the dollar and follow the British procedure. And because of the basically the same reasons that we for example for ever since nineteen forty nine. Have had an outflow of dollars over those coming in from goods and services that we sold and in fact since 49 the outflow of dollars as exceeded the inflow by approximately 34 billion. Well that's a pretty significant amount of dollars and it was just done. Well it used to be a lot of money. It isn't as much anymore. But

on the other hand we must bear in mind that the facts economic facts of life in modern America today are vastly different than the economic facts in the life of Great Britain of the past. We were talking the we can hardly compare the two situations. And furthermore it may be a blessing in disguise. We have been drifting for the last year or two without taking a definite course of action. There's been too much putting off too much waiting. You mean an economic course of action yes. And a political. And I think that the devaluation on the part of Great Britain is shocking us into doing something. It's too bad it had to come that way. It's too bad we didn't voluntarily discipline ourselves that we're having something forced on us. No because all men of responsibility now realize that the American dollar has become the

single most important reserve for all the currencies in the world. Somewhere you have to have a standard. It wasn't an R you know really you know that position started in that really going to be an economic disaster for the for the entire world. If the United States dollar if we lose confidence that we're losing confidence the United States dollar or if the United States should have to sometime in the future devalue the dollar. Oh unquestionably I can't imagine at the moment anything that would have wider repercussions for the beginning of a complete worldwide depression. Dollar to be subjected to an attack that would result in devaluation. I'm just gong to think the dollar is today. Well let me put the case and in somewhat different terms. In the case of Great Britain the devaluation was followed by a few stray countries that also took like action. This was primarily those countries that had had close ties with Great Britain particularly in the financial sense not so much in the trade sense but that had

balances in London and had done their business and their financing in London. Now. If the United States should devalue I see no escaping the fact that there would be a massive retreat so that we would make no relative gain but that we would have monetary chaos that whole world would it Mr Sock Mr Stoddart is quite right. That however I believe I believe is a problem that lies in the future the problem that strikes me as being a more immediate one is that we need to restore confidence in the dollar not so much on the evaluation sense but that rather that the that the holdings of reserve currencies will be solidified that that very short run raid on the gold markets that happened right after devaluation is is a reflection of the fact that people are always scared by such events. And so this could happen that we have to face it there could be a run on the dollar.

Dr. Robinson Don't you think that the importance of gold is being overplayed. It isn't so much the gold as is the stability of the American economy that will be the determining factor. I agree with you. I agree with you. I think that it's it is it isn't it isn't that the global stock figure that we should look at whether we should rather look at at at our own control of our of our economic situation that is it. I fully agree with you. However. Let me put it in these terms that just as been true of the case of Great Britain and which they set up public policies as they did two years ago to try to cure their balance of payments problem and it looks fairly promising for a while. We have had these programmes. There was at least one very interesting official report in the United States two years ago I might mention that told us that our balance of payments problem to be ended in two years. Well here we are two years later and it is ended. So the point I want to emphasize is how intractable a balance of payments problem is. And

you can't get at this by my medicine that is pretty weak. You really have to work at it in every way conceivable. And that is the problem I see right in front of us. Let's examine this balance of power problem which does tend to weaken any currency over a period time. For example when I mentioned a little earlier that since 1949 with the exception of one year that we hadn't had an outflow of dollars which exceeded the inflow by 34 billion over that time. Now this is not due to the fact that we don't sell more goods abroad than we import. In fact we are actually selling more goods abroad than we import. Now our balance of payments problem in this country is brought about by the fact that our United States corporations are making very large investments abroad in plant and other types of equipment. The tourist spending which is increased very rapidly even more and more Americans going

abroad spending more and more money. The foreign aid programs of our year are knighted of our United States government. These are the programs designed primarily for the developing countries to assist them in raising their standard of living and the costs of the Vietnam War and our other military establishments in many other places besides Vietnam all over the world particularly the naval establishment in New York. I started out as a starter How do you get at this. This is the problem is that now what do we do about it. Well I think the suggestion has already been made. That we have an immediate problem that can't wait. So we first should attack the problem on those things over which we have control. Now we control our rate of taxation in this country. Congress can if it will levy a 10 percent surtax. You advocate this I take it from what you just said I don't think we have any alternative Now if we wish to stand before the world as a well

disciplined organization. The other thing that would follow it is a reduction in federal expenditures and possibly a reduction in state expenditures until such time as we brought this in balance. That's something we can do within the next we'll say the next 30 days it could be done tomorrow. Now the larger of course is the Vietnam War. No solution to that can be filed as of tomorrow or a week from tomorrow. But it doesn't mean we shouldn't start and earnestly work and devote all of our efforts to bringing that to a conclusion just as rapid as we can because it is the overriding factor that has brought on the economic crisis. You might say that we face in this country. And that solution must be found. I I affirm you on every one of those points as I agree that that first place on taxes it is imperative that that not just

the declaration of the world but I think that in fact that we that we need to take it out of the spending streams. Secondly I concur with your Certainly on cutting expenditures and in those areas and beat Naam stands at the head of my list too. The thing though that I am compelled to say at this point is that I fail to see though that these things are all quite as easy to do as you say first place in the case of taxes. The last time I read the newspapers I saw a lot of congressional opposition to taxes. I've seen public opinion kind of divided that is this. This bothers me. In the case of expenditures aside from Vietnam. There's been debate but still it strikes me that we find it very hard to get our public opinion brought to the point where we can do it. And in the Vietnam case. Let me say it this way that while I agree with what I want to see if

I were planning if I were planning a physical policy I would have to say that I'm a pessimist not to believe that I couldn't count on it. But I doubt I'd have to make a pessimistic count on expectation of expenditure isn't it true that we anticipate at the current rate of spending and no increase in taxes that we are going to have a deficit someplace give or take 4 or 5 billion someplace between twenty two to twenty nine billion dollars as I say give or take say a million. This is the rate. Well the latest report was 20 but as you say the figures have been all over the. I'm well since I was once I'm an economist let me break in here to say I think that there are four or five concepts of thought outside of the budgets and expanded out one of our problems is that we can we can fail to talk the same figures. I don't care what budget figure you take however because there are there already. All of them all of the budget concept at the present time represent that we don't have a balance of public receipts and public

expenditures which is in keeping with our total resources. We're trying to we're trying to in a sense live beyond our means to. Can any country live. Let's pick your figure saying 20 billion deficit at the current rate of expenditures and the current rate of taxation in any country lives over a long period of time at this rate without again increased inflation prices rising and therefore all of the. Results that come about through this in terms of the balance of payments as well as the internal aspects of the situation. Speaking as an economist I have to I have to possibly shock Mr. Stoddard but say that it is possible because if in the private sector we should have a pulling back of capital expenditures we should have people trying to save money but they refuse suspended. It is conceivable that you could run a deficit in the public sector if you had if you had it. Now I say it is conceivable because thats the first answer to you but that is not what is taking place. That is our expenditures in the private sector

that are now taking place are not compatible with that size of a deficit. Its it makes it in after the inflationary. If I talk to Mr. Snyder No not at all. But it all matter. We held inflation pretty well in control for some 15 or 20 years despite even our excesses. The dollar was has been a pretty good dollar. I think you still have a strong confidence in the dollar I think well based upon its history I think its character is well established and as I read the reports our inflation has an average much over one of the hap percent a year for 15 years and I think it's Dr. Robertson points out a country such as ours could stand out almost indefinitely. But this year we've seen a change they want to have to jump to three and to many of us who are fearful that the trade next year will jump to 5. Now when you begin to think in those terms it's time that the star flags are flying and we should begin to.

I just started I'm sorry to interrupt you. We've come to the end of our time for the Business Roundtable. I want to thank you very much and you Dr. Robinson for appearing I take it that you both agree on the problems that we confront in our economy. You pretty much agree on what we need to do about it. If we have the will to do it. Participating in today's business roundtable where Howard J Stoddard chairman of the board of Michigan National Bank and Roland Di Robinson of The Graduate School of Business Administration at MSU host when the program was Alfred L. Seeley dean of the Graduate School of Business Administration at Michigan State University. The topic for next week's Business Roundtable will be the corporate conference guest on the program will be Herbert D-don't president of the Dow

Chemical Company. This program was produced by the Graduate School of Business Administration and the Broadcasting Services of Michigan State University under a grant from nation's business a publication of the Chamber of Commerce of the United States. Business Roundtable is distributed through the facilities of national educational radio. This is any are the national educational radio network.