U.S. foreign policy: Demands of the next; Within the World Economy

Now as I said the problem is not just an adjustment problem it's a reserve problem. What I mean by that I mean that we are trying to finance a steadily increasing world trade and world production with an inadequate stock of monetary reserves. We have been trying to run the world economy on the basis of gold and the world's gold stock is growing very slowly and indeed the monetary reserves in gold have failed to increase in the last two years and thus over the last years dollars have been used increasingly as a supplement to this inadequate gold stock. But this can't go on indefinitely because the supply of dollars outstanding is now so great that it threatens the ability of the United States to redeem those dollars in terms of gold total dollars outstanding is now about 30 billion dollars and against that the gold stock of the United States is down to about 11 billion. So the dollar can't bear this reserve burden alone. And that is why it was so vitally

important that last year the countries of the world agreed to create a paper gold so to speak to create a new international reserve asset backed by the currencies of all the world's countries. The so-called special drawing rights scheme in the International Monetary Fund. And again we were tragically slow. We Americans and getting around to that solution we should have done it 10 years ago. We finally got around to it last year. Now if that plan is brought into operation as it should be there will be additional reserves created each year in lieu of gold to finance the expanding trade that we all want. Trouble is that again certain gentlemen in the A-League say palace is throwing obstacles in the way of establishing those new drawing rights. He says the United States first has to close its balance of payments deficit. Well here is elsewhere he is totally mistaken he's got the cart before the horse.

The the special drawing rights should be put into effect before the US deficit is closed. Not after it has been closed through restrictions harmful to the prosperity of Europe the United States and the less developed countries. Because unless there are sufficient reserves we're going to take the whole world into a cycle of deflation and restrictionist and the restrictions really won't work. It's like a poker game in which all the players think they don't have enough chips and in that kind of a situation if you don't have adequate world reserves if one country tries to win prove its balance of payments deficit by cutting back on its foreign tourism and its imports. Other countries will simply retaliate because they won't let their deficits increase. While I was in Japan last week and there and of there got a balance of payments deficit too and when they heard we were cutting off foreign tourism the Japanese diet immediately started considering a bill to cut off Japanese tourism in the United States. Well this is a beggar my neighbor policy. It's a

no win policy for everybody unless there are enough chips in the game. We cannot possibly forge an adequate reserve level and a reasonable economic policy. Well I've spoken too long. I apologize but I hope I've given you at least something in the way of provocation and that we may now have an exchange of views. Thank you very much. Dr. Richard Gardner Now Dr. Gardner will respond to questions from members of the audience. The first questioner inquired. How can we overcome our present dilemma of a gold standard. Would raising the price gradually of gold help an. Well essentially First first of all as you know many people think the remedy to this problem is simply to increase the price of gold in other words they say well if you if the problem is there isn't enough gold. That's because it's been fixed at $35 an ounce ever since 1934 we simply doubled the price of gold and we'll have enough gold. Gold will be worth more in terms of

commodities currencies and that will solve the problem. Now Mr. Lewis has a variant of that. He says well we won't double it but we'll just gradually move the price up a little bit each year not too much. Do it a little less than the interest that would be earned by dollar balances. Well I like his proposal better than the immediate doubling of the price of gold but frankly I'm not convinced that this is the right answer. Because I firmly believe that our long term strategy should be to go away from GO NOT BACK TO GO. We want to diminish the role of gold in international finance not enhance it. And if you keep increasing the price you want Hanson and you shatter or reduce confidence in currencies and in international reserve assets of the new kind that I have described surely what we ought to be doing is in this modern nuclear age light and age getting away from what was once

described as a barbarous relic After all it's a barbarous holdover from the Middle Ages that it was yellow metal which is inherently unproductive. People have to be employed to get out of the ground. It's just symbolic in its value. Now symbols are important I'm not in favor of abolishing gold overnight. People are used to it. But let us not go out of our way to win handsome status. Let us think of ways of supplementing it through more rational devices. National currencies and international unit created as a deliberate act of statesman in response to social and economic me because the gold production is the best based on purely geological fortuitous factors which have no relation to the world economies need. But if finance ministers can meet and agree over five years what the world economy needs in the way of reserves that is a more rational approach than anything that increases the price of gold it seems to be Texas backward into the dark ages and not forward into this new way of a rational planned

creation of international liquidity. That's the way we moved in our own country when we created the Federal Reserve System. That was a step towards using a new form of finance in relation to human needs and the national economy. I would just be more concrete and say this increasing the price of gold has two other specific drawbacks. First it would very much undermine the willingness of people to hold dollars in the future even if the rate of increase was this fall as you proposed. People would then get the idea that gold was inexorably gradually surely going up in price and the dollar going down. And in that situation it would be very hard. To encourage people to go on holding dollars in increased amounts or other national currencies or indeed new reserve assets in the IMF so that would be counterproductive. You might even reduce world liquidity net because all the gold would be increasing everything

other reserve assets would not be increased. Now the second problem I'll be very frank is a more political one. The three great gold holding a gold producing countries in the world are the Soviet Union South Africa and France. Now I don't know about you but they're not my three favorite countries and they're not the three favorite countries of the American Congress and therefore any proposal which benefits them primarily and specifically benefits those foreign countries who have been the least cooperative in our dollar problem and the most uncooperative in hoarding gold I think is a bad policy and a political policy and unrealistic policy for the United States. Yes but question essentially if I understand it is in the face of our present preoccupations with the balance of payments and gold problem in our domestic social and economic problems and Vietnam is it

realistic to think in terms of a big jump forward into free trade is that centrally the question. Well I admit it's not easy to be optimistic. My crystal ball today is very clouded on this subject. I could not confidently predict that the people of the United States would be willing to move to this broad. We have to try. And leadership is the thing that makes the difference. What I miss in the United States today in this area and perhaps in some others is leadership. If the American people are told what the balance of national advantage is they usually respond. I hoped I was one of those fortunate enough to go down with President Kennedy in 1960 won and we drafted the trade expansion. And I remember when we were discussing it people said You'll never get this through Congress will never have a Kennedy round we'll never be able to slash tabs across the board by 35 percent. We

did it was a big struggle but we did it. And I would quote the remark of a famous historian who once said revolutions seem impossible before they occur and inevitable after they occur and thus there are tremendous possibilities. If we have an understanding of the real national interest and I'm prepared to move and I'm hopeful that if we can get by some of these current preoccupations we can move in the decade of the 1970s. Dr. Gardner was asked if it wouldn't be necessary for the United States to balance its domestic budget before it could achieve these other fiscal advances internationally. Absolutely right. And I only omitted that this is part of the problem of the pressure of time and I had it normally include that somehow it just got dropped out at the

end. But that's a very important corrective and a very important element in the package. Let me just amplify it this way. If a country is irresponsible and in his domestic economic fiscal and monetary management it cannot expect international economic cooperation from its trading partners. The other countries as you say want to know if they are going to promise to do all these things. What are we doing. Are we going to maintain relative price stability and our competitive position. And therefore I personally believe we've got to have this tax increase which the president has proposed. Otherwise we're going to have a massive budget deficit and substantial inflation if we don't have the tax increase the only way we can possibly contain inflation is by driving interest rates way up. And that has undesirable consequences in some areas. So one way or another we've got to come to terms with his domestic

problem. Now I would just add this thought however I do not agree. I do not agree with those economists who put the primary blame for our balance of payments deficit over the last 10 years on domestic inflation because I think the facts are quite impressive that if you go back over the last 10 years as a whole. How would Mitt the last six months have not been good but leave up the last six months. The Ten years from nineteen 57 to 90 through nineteen sixty seven at least till the last quarter 67 the United States has had substantially less inflation. Substantially less inflation than any other major industrial country. Less than even France so that when De Gaulle talks about our exporting inflated dollars he's talking through his hat. We've had less inflation and France less than Italy less than the UK less than Japan we have had a very impressive record of relative price stability I think relative because we've gone up crept up a couple of percent a year. But relative to

that of our trading partners it has been a pretty good record. Now the trouble is we've begun to sweat in the last six months we've got to stop that slippage because if we slip now and our prices get out of line with world prices and I wages get out of line with world wages we can hold the balance. So I think your point is very sad and I'm grateful to you sir for adding this very elementary and basic factor to the equation. Yes but the question is if we go increasingly to a new reserve asset and this doesn't mean abandoning gold it simply means supplementing gold by this new drawing right. The question is how would values be determined when everything would go on as before. Dollars would still be quoted in terms of gold and other currencies that be fixed. Paddys in terms of the various national currencies traders would go on in the same way getting currencies for their goods the only difference

would be that there would be an international pool and governments every year would be allocated a certain amount of drawing rights in that international pool. And these would be exchanged between central banks. They wouldn't. This new money this new paper gold would go into the hands of individuals it would simply be a means of settling accounts between central banks and the statesmen of the world would decide at the beginning of a five year period. How much new money should be created. And actually it would be kept within very modest limits what they're talking about tentatively of something between 1 billion and 2 billion dollars a year which relative to two hundred billion dollar annual imports is very small this is a modest accretion to the world's stock of monetary reserves but it's designed to fill this gap caused by the failure of the world's monetary gold stock to grow. See what's been happening is gold

production has been declining and as if that weren't bad enough the gold such gold is being produced is going into somebody's mattress or into the holes in the ground people are hoarding it. I don't know who's doing it Frenchmen or Maharaj isn't in the air. People in Zurich known as observant as they call him are hot. But the gold is not flowing into the monetary reserves. It's being held and the people are holding it I think you're going to find themselves outsmarted because they're losing gold as a knot doesn't yield any interest. And if they put that money into American equities 10 years ago they'd have twice as much money or three times as much money so they're stupid really because the loss of interest or lost of capital appreciation more than would overbalance any possible revaluation to go. But they're playing that game and they're playing it not now more than ever because they think we're going to be knocked off the gold party we're not going to be knocked off the gold back. We're certainly going to do everything we can to stop that. But we've got to prove to these speculators that they're wrong. But there is this hoarding

going on and that is a very serious problem and that aggravates the inadequate supply of monetary goal and therefore we've got to have this increment of a billion or two or maybe three and some years to see that the world is adequately supplied with money for a growing world economy. Yes the gentleman asks quite reasonably How can we be sure that the end of the Vietnam War will really reduce the deficit may just stay as it is and be affected by other factors Well I can't be sure but I do know that we were on the way to at least containing this problem until the Vietnam thing got really big. We had brought the deficit down to 1.5 2 billion in the period 65 64 65 66 and we've really slipped backwards in the last 18 months and I think part of that is directly attributable to Vietnam the administration admits that one and a half billion dollars is

directly river the result of the military spending in Vietnam. And what's particularly vexing is that for a lot of technical reasons a lot of that money flows directly into the French Central Bank. Say as if it weren't bad enough we're spending money in Vietnam and it's adding to the gold reserves of France. It's a very unfortunate thing but that military spending in Asia is adding reserves to the very surplus countries that are the least cooperative and I have no doubt that ending Vietnam would help. I don't say it'll solve the whole problem because as I've suggested earlier the basic problem resides in the fact the world's monetary reserves are inadequate and therefore the real world has to rely excessively on the dollar and be on the fact the United States is performing this role of financial intermediation supplying capital to the world and we've got to get the world to supply more of its own capital needs. I mean really when you think of it it is rather anomalous that in this day and age

1968 the European countries with their new affluence with their fantastic growth have to import nearly a billion dollars of American capital a year to finance their industrial expansion. Now why are they doing this. Well it's not only their capital short but they want American management skills American technology American know how which they still don't generate in sufficient measure themselves. It's been a wonderful book put out called The American challenge to defeat America by John Jacques 7 Schreiber. Some of you may have read it and he takes the Europeans to task he says look everybody complains about American investment in Europe but it's our fault we Europeans and for all of that on the job we have no business schools. We're not generating enough new scientific development because we have inadequate research here and we don't have a capital market. I mean European business and European middle class and upper class they don't have the habit we do of putting it into their

big industrial corporations buying equities. They'd take gold. Put it in the mattress or they put money in a numbered bank account and hold it. They don't have the great American tradition of ploughing back savings into productive growth and corporate equity. Now the Europeans have got to develop a European wide capital market and this means major institutional changes including something like a Securities Exchange Commission in Europe that will give full disclosure from their big corporations to the average individual that's given confidence that is investment will be a sound. And this is going to take time. But there's no reason we should be financing Europe's growth. On the other hand we have to get over this transitional period. So I agree with the gentleman that Vietnam is not the whole answer but I think without Vietnam we would have the time to move into these adjustments without an atmosphere of panic. Yes the question is 1 percent of gross national product

enough for three continents and all these people. Well sir if you say it should be 2 percent more power to you but here we are in the year 1968 and we have slipped back from eight tenths of a percent to half a percent of 8 as a proportion of gross national product. We just look back in the last five years. So if you want to tell me one percent too modest a target let's send you to Congress but I mean if we could hit that 1 percent target modest as it may seem to you it would be a tremendous step forward it would mean a doubling of foreign aid efforts by the United States Europe and Japan over the next decade and I'll settle for that if we can get it. Thank you very much. This is been the third in a series of seven programs about United

States foreign policy entitled demands of the next decade. Our guest today was Dr. Richard Gardiner professor of law and international relations at Columbia University and senior advisor to the United States ambassador to the United Nations. He spoke and responded to questions on the general subject of within the world's economy. This program series is based on presentations from the foreign policy associations traveling foreign policy conference. These programs are designed to stimulate the thinking of an informed American public about some of the issues to be faced by the nation during the coming decade. Today's program was presented in cooperation with the World Affairs Council of Oregon the Oregon great decisions Council the Foreign Policy Association and TIME magazine. This has been a public affairs presentation

of Oregon educational broadcasting. This program was distributed by the national educational radio network.