Revolution: 20th century phenomenon; #8 (Reel 1)

Goal production is not sufficient to assure appropriate growth of international reserves. The total known accumulation of gold mine since the beginning of the history. Yes. Put all together and given it a value of $35 an ounce. Would amount to approximately 80 billion dollars worth. That was Mr. Richard Aedy ogle vice president and general manager of the international banking office of the Bank of America speaking at the twenty sixth annual Institute on world affairs conducted as a special feature of the instructional program at San Diego State College. The institute is dedicated to the use of the free academic forum for the presentation and discussion of current and continuing issues of international significance. The main theme of this year's Institute is expressed in one word revolution to introduce our speaker on finance at this session. Here is Professor Minos generalise director of the Institute on world affairs.

Here to speak to us on this matter. Is Mr. Richard ogle from the Bank of America. Where he is or he has served as international loan supervisor in the San Francisco headquarters. And is presently vice president manager of the Los Angeles International Banking office. Mr. ogle has. An origin in New England. He graduated from the Stanton military academy in Stanton Vinit Virginia and he attended the Royal Italian university for foreigners in Perugia Italy and the University of Rome in Italy received his B.A. from the University of Minnesota and then served in the war until 1945. From then on he has been with the Bank of America. He served also abroad in the capacity that that bank has assigned him as manager of the organic branch in the karate practice in Pakistan. Give us great pleasure to introduce to you Mr. ogle to

speak to the subject of bank. Thank you. If the generalists. Assembled or disciplines in this institute. It's a real pleasure to be a participant of this 26 annual Institute of world affairs of San Diego State College My only regret is that I cannot. Take advantage of Mr generalized kind invitation to stay and hear the other speakers and to participate in your discussions concerning this subject of revolution 20th century phenomenon. Today is my first visit to San Diego State College campus since 1955 56 when I used to come down here recruiting for the Bank of America for our college training program. I would say looking around your campus that a bit of a revolution has taken place here since those times and judging from stories in The L.A.

Times the revolution is continuing every day and does not necessarily involve physical changes of the campus and this may be good. I say it may be good because after all. The purpose of this gathering is to study revolution 20th century phenomenon. And to consider the many things that are taking place around us. And it's for you to decide what may or may not be good. In midst a generalized letter of ended invitation to come here he said the most vital question is must the world be built on the destruction of the old or will man have the wisdom and patience necessary for the selective preservation of the unchangeable human values and for the grafting of creative elements under the existing system. Revolution 20th century phenomenon. It's a thought provoking title. It's a

little bit of a sobering title. It is high time that each of us. Give serious consideration to the current events swirling around us with such frightening forces. Where indeed are we headed. As I pondered this title and the terrifying thoughts that revolution 20th century phenomenon brought to my mind. I began to wonder. Why a 20th century revolution. Is this something new to history and what do we really mean by a revolution. So I got out my Webster's and looked up revolution and I found some definitions that were a little bit reassuring. Runne definition. It continued Carse. A space of time marked by some cycle or by a succession of similar events a chain produced by a time. And the second definition a total or radical change of circumstances or of a

system. And a third a sudden and violent change in government or in the political constitution of a country. Two of these three the affirmations seem acceptable to me. The first change produced by time give sort of a comforting feeling a connotation of orderly change. Events that do not remain static and are stagnant but move ahead. The second. Carries a connotation of a little more of of violence involved. But at the same time gives a feeling of constructive change. Circumstances do change and we must of course remain flexible and change with them. The third definition as far as our discussion is concerned I reject outright. A sudden and violent change in government or in the political constitution of a country. No American should be prepared to accept this as a 20th century phenomenon. We have had this third type of revolution demonstrated

many times over in past history. The English revolution overthrowing King James and 16 88. This was a 17th century phenomenon. The American Revolution 1775 to 83 an 18th century phenomenon. And the French Revolution. Over the years of 1830 through 1870 an 18th century phenomena. For the preceding three centuries then we have seen examples of major revolutions in the violence sense. But there's to me as I said is totally unacceptable. You gentlemen were contemplating and ladies contemplating revolution 20th century phenomenon. I hope we'll come up with new ideas new ideas that can be transposed into action ideas that will make it possible. To for Americans to take the wisdom and I quote again with the general a lot of the wisdom and patience necessary for the selective preservation of the

unchangeable human values. Now let's combine definition 1 and 2 and how they change produced revolutionary change produced by time as a change of circumstances. With this definition in mind let's turn and study the international monetary system. And where do we go from here. There has been a continuing change in our international monetary system over the past year. A change produced by time and changing circumstances. World trade has mushroomed during these years. It has doubled since 1957 whereas world reserve assets have only increased 30 percent. To better understand the revolution that has taken place in international trade and the tremendous stresses that have developed in our international monetary system. Let's review first our gold situation as it appears today. Second.

I present international monetary system that came into being in the Bretton Woods Connecticut conference that gave birth to our International Monetary Fund. Third our balance of payments position and confidence in the U.S.. For the proposed special drawing rights and possible reform. There was a time in the early history of international trade when all settlements all payments were made and actual physical transfers of gold from one country to another. This was cumbersome slow and expensive and changes had to be made to keep up with the growing volume of international trade. Sweeping reforms were made in the Bretton Woods Conference of 1944 and for the next 17 years. Our system has gone along smoothly based on the foundations laid in this conference for the past six years however strains have become more and more apparent in our

international monetary system. This post-World War to system. The old system has served us well but it is still based on gold as a primary reserve. And thereby lacks a certain degree of flexibility. In discussing gold. It is important to remember one vital point. Gold and other international monetary reserves are not used to finance all international transactions since many of these offset one another. Gold or the international reserves are used only to finance m balances the deficits and surpluses that exist among nations. This is why the quantity and quality of reserves is so crucial to our continued international trade. Gold production is not sufficient to assure appropriate growth of international reserves. The total

known accumulation of gold mine since the beginning of history if put all together and given it a value of thirty five dollars an ounce. Would amount to approximately 80 billion dollars worth. Of this amount four fifths or sixty four billion dollars worth has been mined in the past 100 years. Half of this amount or 40 billion dollars worth has been mined in the last 50 years. The greater accumulation in the past 50 years is not unfortunately due to new discoveries but is due instead to the increased price of gold since 1934 and the more modern and more efficient methods of mining gold. Free world gold production totaled one point four billion dollars in 1967 and represented the first decline in many years. This production drop was largely due to an 11 million dollar drop in the production of

Union of South Africa. An area where gold production had been steadily increasing since 1953. Total non production in 1967 declined by 20 billion dollars and it is estimated that 1968 will see another decline of 30 million dollars. Additions to the gold stocks and from the total gold stocks of the free world must come from two sources. Either must have new discoveries new production or from supplies or sales of the Communist Bloc countries are of course a combination of the two. The gold so produced flows into three general. Types of users. The central banks and the governments of the member countries of the IMF. I tested in industrial users and the private speculator holdings of individuals. As short a time ago as five years. It was estimated that the total production

of gold was adequate to serve us all three of the needs of these three groups. Now it is apparent. That these estimates were wrong because of golden excelled quality as in the electrical conductor and because of its chemical enter in this. In the present day electronic and space age the demand for gold has mushroomed to such an extent. That the private use of gold alone will sharply equal the total free world production. It is estimated in fact that by 1973 the jet a legitimate testicle industrial uses will come up to the total production. Well before this critical point arrives. We will either have to change our reserve system our face of freeze in world trade and development. A great deal of attention has been focused on the loss of gold by the United States and by the corresponding increase in gold holdings of other countries the US gold stock has

declined sharply since 1952. When at that time the United States own 65 percent of all the gold held by the central banks of the free world. Well there has been a great deal of publicity given to the subject of the gold of France has been taking in the hearting. The official gold holdings of all of the European countries have risen since 1950 to. West Germany has increased its holdings almost as much as France says. Even though the pound sterling was under pressure before devaluation of the pound in 1967 the official gold holdings of the British Empire at the end of 1967 were just about the same as they were back in 1952. United States is not however the only country losing gold because of the underdeveloped countries the last developed countries have lost six hundred and sixty eight million dollars of their official gold over the same period of time. You know as much as gold has long

provided the base or at least an important part of the base of the monetary system of the United States. It is perhaps worthwhile to take a second and look back over the last 30 or 40 years and review the size of this base in relation to the size of our total money supply. From 1915 to 1930. Gold was coined and circulated freely and the ratio of monetary gold to the total money supply fluctuated from 10 to 18 percent. By 1935 the ratio had advanced sharply to almost 38 percent. And by 1940 had reached an unusually high percentage of 52 percent. These very high ratios were probably abnormal and reflect more of the pressure on reduced money supply than an increase in gold. The unprecedented accumulation of monetary gold was also affected by the devaluation of the dollar and the flight of gold

from Europe with the rise of Hitler. From the end of World War 2 until the present time. The ratio of monetary gold to the total money money supply has declined until it reached a law of 6.3 percent in 1967. Another way of looking at the diminishing importance of gold at the BET is the base of our domestic monetary system is to examine the girl gold reserve ratio. We just consider the relationship of gold to the total money supply. Now let's consider the relationship of gold to a particular composite of the money supply of. The currency issued by the Federal Reserve buying US. In 1944 and the reserve banks were required to maintain gold certificates amounting to 40 percent of their not liabilities and 35 percent of their deposit liabilities. In 1945 the legally required ratio was reduced to

25 percent. Both note and deposit liabilities. In 1965 the gold certificate reserve requirement was changed again requiring by a Reserve Bank to maintain 25 percent against only the federal reserve note liabilities. As the actual ratio of gold certificates held by the Reserve banks to federal reserve note liabilities rapidly approaches 25 percent requirement. Congress was asked to repeal a law requiring a new gold reserve ratios at all. The Bank of America support of this appeal. The repeal of this law and one of our top officers executive vice president Sam Stewart testified before the Senate in January of this year and said for at least several decades now the monetary function of gold has been an international reserve. We can no longer afford the anachronism of a domestic cover when all of the available monetary goal is

vitally needed for the one function that can still fulfill as a reserve supporting the external value of the US dollar. In March of this year of course President Johnson signed the new bill doing away with the gold cover requirements. The U.S. monetary goal stock has been in the past. Large enough to provide comfortably the gold it was legally required as backing for our domestic system. And to meet any foreign claims placed on the United States. With the removal of the domestic gold cover. The entire gold stock is now available to meet our international commitments. There is no reason to view the growth of one short term claims against the dollar with a line. We must realize that to a large extent foreigners have held US dollars because they wanted to hold U.S. dollars. And because they needed them. The US dollar is the major trading

currency of the world. If an Italian businessman imports Japanese products he will probably be billed in U.S. dollars. If there is a disturbance in the British market for British pounds or for German or for French francs the central bank of the country involved will under mutually agreed rules understood under the auspices of the International Monetary Fund moved to stabilize the market for its currency by buying U.S. dollars. Countries that ask for foreign aid are for loans. Most certainly want U.S. dollars. The truth of the matter is that the U.S. dollar to that it is the cornerstone of our present international monetary system. Some countries however are accumulating U.S. dollars faster than they want them. While outflow of U.S. dollars have provided needed capital to stimulate

economic growth and many other countries of the world it has also created some concern in these countries that the tremendous economic power of the United States would be able to exercise such a dominant influence over the affairs of the countries involved that they would lose control of their own. Problem. The United States gross national product increased by 40 billion dollars in 1967 to a total of seven hundred eighty five billion dollars. There are only five or six countries in the world today who have a total gross national product equal to the increase that our gross national product showed in 1967. It is not difficult to understand under these circumstances why other nations are concerned about our economic strength. And are worried that substantial inflows of U.S. dollars will generate inflationary pressures on their economies.

At the present time. Official international monetary reserves including gold and foreign exchange and the reserve positions of the various nations of the world in the International Monetary Fund while official gold holdings still represent the largest single component of these reserves. Gold constitutes a much smaller percentage today than in the past. In 1950 official gold holdings represented almost 70 percent of the world international monetary reserves. This proportion has fallen progressively to 65 percent in 1960 and 55 percent in 1967. Official world reserves have increased in recent years largely because of holdings of the United States dollar as. These dollars have increased because of the short term clean increase of short term claims against the United States. When foreign governments that have more U.S. dollars and they want to. Convert their

excess dollars into gold at the U.S. Treasury the foreign reserves shrink. Because when the dollars return back to the United States they are no longer foreign reserves. Circumstances then have changed. Time moves rapidly forward toward the date of 1973 when it is estimated that gold will be in critical supply. Short supply. And we had better prepare for a revolution in our international monetary system. The situation has in fact been greatly accelerated. And the time of revolution is probably upon us today. As confidence in key national currencies as confidence in the workability of the present international monetary system as the terrier did in the last two years. Private demands for gold have consumed all known newly mined goal and have actually drawn down the official gold stocks. In 1967 approximately

one point three billion dollars of gold was taken from official stocks to meet privately Mann's. The liquidity available to finance world trade continued to shrink. And we must find a way to materially increase free world gold production or revise our international monetary system. Now let's review our present international monetary system. This is a complex framework of agreements which were drug brought together under the auspices of the Bretton Woods Conference in Connecticut in 1944. The member countries of the. The International Monetary Fund drew up a set of agreements that have been with us and have been the basis of our international operations ever sense. At this conference rational man from many nations created the world's first truly international monetary system. Even at this time Mr. Keynes predicted that an over reliance on gold

would eventually lead to an inadequacy of reserves. And he argued at that time for the creation of some new form of international money. In spite of the failure to act on his recommendations the system has produced. And has served us very well. Basically the system is based on five points. One that the U.S. dollar is convertible into gold at $35 an ounce. To that other major currencies are convertible into U.S. dollars at stated rates of exchange. Three that there are adequate monetary reserves and credit facilities available to support these two points. For that a country over a reasonable period of time. Will maintain a stable international position in its balance of payments position. And. That a

country in seeking to stabilize its international position in the system will consider the effects of its actions on the position of the other member countries. During the past few years we have seen these five points placed under tremendous stress. Four out of five of these basic building blocks have in fact been violated. Point number one under the new two tier goal system. The US dollar is only convertible into gold. Among the other members central banks. Point number two is the only one that really remains on the train. The major currencies are convertible into the U.S. dollar at stated rates of exchange and with the exception of the devaluations it took place as last year devaluation sanctioned by the IMF. The member countries have been able to hold their currency values between the permitted. Support points of one percent on either side of their parity. Yes.

Point number three. There is just do not appear any longer to be adequate reserves to take care of the requirements of points number one and point number two. In point number four. The US has had a balance of payments deficit for 17 out of the past 18 years. This is of course a stable position but unfortunately it is a negative one and hardly one tight stable position that the IMF founders had in mind. Point Number five a country will consider the effects of its actions on the positions of the other member countries. I'm afraid that France and their treatment of the United Kingdom and of the United States in the past few years has forgotten the courtesy call of far under this pine. And sold four out of five of the Bretton Wood basic agreement points have been violated. And if you consider the currency devaluations that took place as a violation Point number two

then all five of these pints have been broken in the past few years. To keep our international monetary system intact. As we know it today. We must. Repaired these five violated principles or replace them completely or form a new set of principles by grafting new ideas under the old branches are again the quote was to generalize by the grafting of creative elements into the existing system. Before we pass on the consideration of potential new ideas. Let's review two other powerful factors that threaten our existing system. Confidence in the USA and our balance of payments position. Confidence in the USA so many of our minimum. Monetary problems of today the outflow of gold the stresses and strains on our international monetary agreements. I deficit balance of payments.

All of these revolves around confidence in the US dollar and confidence in the U.S. economy. Confidence that we can sustain the tremendous growth of our economy needed to provide jobs for a rapidly expanding population. Confidence that we can control inflation. Confidence that our government can reduce spending. Confidence that we can meet many international commitments. We must restore faith in our ability to manage our own affair. We must preserve the integrity of the U.S. dollar. The U.S. government must do its part forcefully to curb inflation and to correct its payments imbalance. We have finally taken steps in this direction with a tidy tax increases last June. We are cutting government spending programs. We must restore our confidence at home and abroad.