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The following program is made possible through a grant from nation's business. Is a business roundtable a program of current comment from leading members of America's business community. Today Edward Littlejohn vice president of Pfizer international company and Mordecai crane and professor of economics at Michigan State University will explore the topic. U.S. international money problems with series host Alfred Alice dean of the Graduate School of Business Administration at Michigan State University in United States money problems have been coming to the fore recently with a request from the administration the Congress for legislation and putting into effect under authority already vested in the Commerce Department some regulations
affecting. The investment of American business abroad one of the measures proposed with regard to our people is the tax on tourists which would be a graduated tax depending upon the amount of money they spent while they were abroad. These are the first measures. That this country has ever proposed or is ever put into a fact. Correct aspects of controlling a balance of payments problem Dr. Crane and how did we get in this situation. Why is it that we find that we have more dollars flowing abroad now each year than we have coming into the country wanted in the United States has had a balance of payments deficit ever since nineteen fifty an evilly save in 1957 by a deficit we mean that more dollars leave the United States every year
in payments for its full services goods and services to waste going abroad and capital outflow Then dollars coming into the United States for the IATA purposes. This deficit has not been paramount in national policy during the 1950s and that for two reasons. First of all it was not particularly large in size during the 1950s up until 1958. Secondly it was regarded by all concerned as a very desirable phenomenon. Foreign countries were very happy at the time to go on accumulating dollar assets which are the counterpart deficit and they guard these assets as their international reserves. Now Countries like to have international resolves to tide themselves over the rainy day so to speak just like a family like. In other words this is money in the bank for its money in the bank.
Dollar was as good as gold and did better than gold at the time. Everybody wanted dollars. No one want to go so that with the expansion of international trade and the increase in need by countries for international sales it was considered highly desirable to have the supply of elves coming form the United States balance of payments deficit. Now something happened in 1958. First thing the size of the deficit shot up considerably doubled I believe in 1958 compared to earlier years at least. Secondly there were several European countries who have become somewhat such a weighted with dollar holdings and wanted some gold for it so they came to the United States and started converting some of their dollar assets for gold. Well the United States gold stocks as a result of the decline from about 25 billion in 1958 to eleven point eight
billion today. So we see that we have year double barrel problem. On the one hand the entire international financial system is build on the dollar as long as the country is going to go on to be guarding these dollars so there is a should we believe the balance of payments problem tomorrow. Bridge to get. There would be an attendant pull as to where would those reserves come from. But this wouldn't be a problem for the United States. No it will be a problem for the Internet you know other parts of the world on the other hand should we go on aligning deficit's on the same magnitude as we are running today. I don't. Countries may lose confidence in the dollar and the entire international financial system could collapse. So it's a double problem and we have to realize it as such on the one hand we have the problem of supplying international liquidity which helps country essentially buy time in case of deficits
and out of then we have the problem of adjustments. That is we are buying time for something in order to sooner or later our just our situation and care of the deficit so that these two problems are intertwined but also have to be distinguished as two separate problems. Well Mr. Littlejohn as a business executive with a very large international company you have plants and how many countries now or approximately how many. Well we have plants in about 80 countries 80 countries. In Europe I suppose we have about 20 25 and these have been expanding at a rather rapid rate have as a matter of fact it's an interesting fact that Pfizer for example began to go abroad and make direct investments about 1950 we had to export before then so that the great expansion phase I and other businesses because this trend was general has been since 1952 to till today until in
fact we've built up an economy abroad of international U.S. international production that is larger than any except the domestic economy here and the Soviet Union in other words your company's history has been typical of some other United States companies of roughly starting in the 50s a very big expansion of building plants abroad for sales in other parts of the world. That's that's correct. And I should say that in discussing the balance of payments when one looks at those capital outflows that Dr. Crane has mentioned one should always remember that these capital outflow flows the sauce if you like the agent for bringing back important and larger capital inflows and that's what has happened in the last since 900 for no why did you build the plants abroad and start it. Manufacturing the products here the pharmaceuticals and shipping ins abroad and selling them there.
Well this is a very important point because often one gets asked the question well why didn't you just export wouldn't this have been better and better for our balance of payments. Some people have said Fact is you have no alternative. A company would like nothing better than to stay in this country and to export food just to be distributed. But in these days you simply cannot get the market that way. You have to have a distributor cannot do the job. Also many countries want industrial development they want factories in their own countries. And if you don't build out other people will. So that we have a God and the important objective outcome company is to do what is ever necessary in a particular market abroad whatever it is in order to maintain and expand. Now what happens what happens to the profits. That come about through these operations abroad but didn't see the costs in the early years. The profits on mainly reinvested. You have to
build a base abroad and the decision was made that we would go abroad and reinvest earnings in order to expand. And then you reach the point and you have to reach the point because you have stockholders in the United States and they're not prepared to let money go out all the time without some of the turn you are pushed in other words by normal business and sound business pressures to bring back any. And that's about the position we're in now where we supply about 50 percent of the dividend. Charles face a company well no Dr. Crane you mentioned of course one of the problems in terms of the balance of payments had been these investments abroad by American companies. Mr. Littlejohn just mentions for example that it's true there are very large investments abroad to get these plants into production get them started get them organized but then over a period of time much of the profit at least comes back to the United States. Well now is this.
Also a long and a short run problem. Well I think there are two points that are relevant to the overall picture. Number one is Mr. Little Littlejohn suggested there has been an accumulation of business assets bought so that on the on long term basis the United States is definitely a nation of surplus we probably own abroad about 50 billion dollars worth of assets. The balance of payments deficit is essentially a liquidity question. That is the government of the United States does not have access to these long term assets to bridge the gap in the balance of payments. The second thing to note is it is very dangerous to attribute the balance of payments deficit to any one item in the balance of payments because of the interrelationships between these items. If we take investments abroad for example can we say that if we cut out investments abroad we will eliminate the deficit. My answer would be definitely not because
there is a great amount of exports associated with our foreign investments process. There is the path we had earnings which are now running about five billion dollars a year and I do positive items in the balance of payments which are associated with our investments flow as a book. You say their dicks use me a minute did you say that the profits coming back from these companies are now running approximately 5 obscenely vied billions a year. It's almost double the amount of investment outflow I think I'm not I don't I'm living correctly so it's very difficult you see to attribute and say well it's the investments that do the job that cause the problem. Now obviously one might say the profits their iPads related earnings is a long one proposition you only get those back after several years. But let's not forget that the long run is nothing but a succession of short runs and we have had a controlled program heal over phone investments over the last
three years voluntarily to be sure the beginning but now it's good it's becoming compulsorily and I believe that within a year or so it's going to be hurting our balance of payments. We might say incidentally the same thing about lie without it. I read that. Well if we hold back on vestments today. It will today help our export position because companies going abroad use a lot of American equipment and that shows up in our export item of the balance of payments we hold back investments and exports. That's in the short that's in the immediate right the very same year. Now that's probably about a quarter to a third of the outflow right there. Now in this in subsequent years we have two phenomena. First of all additional exports by the companies in the form of loan materials semi-finished box and equipment. Early part we had earnings. It's been computer to pay off period on Foreign Investments in New York ones not much longer than five years maybe seven years so
in some cases yes. So we would be running into a problem here. Incidentally I might add that the same is true not only of foreign investments of other programs in the same way take the aid program to government a problem but most of the United States aid program aboard is in the form of tight aid. We require that aid we see countries aid receiving countries to spend it in the United States. Dr. Crane if I might go back though just to the question of the effect of controls on investment. The important thing about the current mandatory program is that it. It reaches in and takes far more of your earnings demands that these earnings be brought back far more than a prudent business decision would indicate. Now if you say well can we live with that. Business is a pretty strong institution.
On the whole you can make a decision to maximize profits this year or next year according to accounting practices own needs and so on. In other words there is a certain changes in cash flows you can make. But we've got to remember that you cannot. All these business schools we have around the country are teaching managers to manage business as efficiently in reaching into these cash flows. We are making them the managers manage them in efficiently and we are told that the technology gap is really a gap of European ability I mean European backwardness and this and and American capacity. What we are in fact doing is bringing the efficiency of our businesses abroad down. And this although you cannot identify it here and now and next month and next month must an evidently weaken the position I take it wants both of you said that you would oppose both of you would oppose mandatory restrictions on American business investment abroad in plant and equipment etc..
Correct. I think they defeat the purpose of the program. I think that particularly that the the films chosen and this control defeats the purpose of the program. I absolutely agree I think that the investment restrictions by the United States will absolutely backfire. Even without any phone with allegation assume a way forward. That's why if I may add to that you know we've been rather proud of our businesses abroad we time going to a country where the government knows we're coming so to speak and generally you just get to see us there. I'm not talking about criticisms you in some cases but generally they have been a welcome there's been an understanding. The values the economic resources that the companies bring and we have tried to avoid any kind of reaction. And there have been some reactions as I mentioned.
By living as a good citizen of these countries and saying throwing local people. We have very few Americans abroad but now these regulations say to all these people that the United States regards these businesses as their own to do with what they wish to retain take their cash flows take their earnings even if they are a minority shareholders. Even if we have other shareholders sometimes if we're there they're in the majority. We still say we have the right to determine what that what will happen to those earnings. And of course if as a result of bringing all the earnings back we have to borrow as we will to maintain that and says this is going to have in many cases a significant impact on their capital markets. Yeah I think that's the way to think about it. That's really an important point for international relations. I think that overall the program will defeat itself. I'd like to add one more point concerning the method of control. Let us go and for
one minute something we disagree with but let us go on to the United States would like to restrict the outflow of foreign investments for the balance of payments purposes. Let us go on that. I agree that's quite a concession but let's make that concession. I would like to propose that the system that the United States government has adopted is essentially a quarter system of allocating every company South Cordele foreign investments based on some base period in the past. That's been the sister voluntary system in the past three years. Now the major value of all that should be condemned controlling valuable phone vestments is expected botted ability that doesn't end well or into the control mechanism. And I would like to suggest that if we replace that quota system by some sort of a tax on foreign investments. That fact could be to hold back some foreign investments but only those which are least buffet about that
is only them will pull off of the bill invest another Levy had a tax on them which would be able to pay the tax would go ahead and this is simply another way of saying that a tax system is a quota system. Not that I condone distractions at all. But if we will to have actions why not adopt the most efficient way which would yield the most profitable investments. Well Mr. Littlejohn won't regulation a mandatory regulation of this type. Bring about that the Pfizer company and other companies in the same position want to expand their plants or build new ones. Aren't they going to therefore start borrowing the money for this abroad instead of using their US dollars. Well that's right they had in many cases they have to to borrow abroad in fact in the case of many companies they've acquired remittance because they performed well under the voluntary program is so high that they will have to borrow even to maintain their business.
And of course maintaining a business isn't just housekeeping but placing wear and tear in a technological business with a lot of innovations it's replacing equipment introducing new processes so that you know you've got to even without expansion but also of course the question of acquisitions acquisitions often a significant in the growth of a company. They go to you or they go to a competitor and it will be more difficult to look for funds for them. Let's turn to another aspect of this problem. Another part of the. The solution proposed by the administration was to restrict tourism people going outside the Western Hemisphere. Now this is going to be suggested as a graduated tax on the amount they spend overseas. Is this going to be really significant Mr. Littlejohn. Let's assume even it works is this very significant in the total picture. Well I suppose the expenditure is large though. We leave open so many Daws in the way of Latin America and other places that
it's going to be difficult it's difficult for me to see how it will be administered and how it will actually have much effect because it still leaves dollars flowing out to some areas where it would be obviously very difficult to enforce. I must say that at least since they have adopted a graduated tax it's at least somewhat more equitable. And. Not as inefficient as it would be if they simply. Abolished phone Travelodge together but let's remember that interferes with the freedom of the individual if they simply put on their like restrictions when they avoid it that the government has avoided that. Let's father remember that there could be retaliation. That is all of these actions move us away from a 20 year old's flows of capital investments in people across national boundaries. Now because of this balance of payments Paul problem which is what is it a 4 billion
dollar a year deficit in a national economy of heat under a billion dollars a year. We are moving away from a 20 year towards liberalization and a question of foreign to retaliation always looms in the background. You see I think this is very important because companies are naturally they must cooperate with the government. And all these comments are making a concerned not with an a lack of desire to resolve the payments problem but concerned with whether we're going about it the right way. But. If you just look at the regulations and lot of them are not clear. As you know many companies are now rushing to Washington trying to get interpretation. What you don't know is what is going to be the result of the later they delay sions in a hundred ways. Capital Markets weakening businesses. The tally ation. This is the this is the real concern.
But I don't get it. Excuse me for a minute I think the effectiveness is a good point when it comes to Tuli isn't what I said before about interrelationships between balance of payments items. Probably applies at least to Tulisa. You see banning retaliation. Probably if we're restricted to Islam that would help. Except that even there there some interrelationships for example the sales of jet aircraft for an airliner house which well running about 600 million dollars a year would probably develop as a result. So even there though it's probably going to be some negative feedback. You know for example last year our balance of trade deficit. In other words once of payments and balance payments rather offset amounted to about three and a half to four billion dollars. About 2 billion of this was the difference and tourists in balances another word to get our people our American spent roughly that much more
than those foreign people coming to this country as tourists. But then I look at the cost of all of our troops abroad and this is running at a rate of a little over 4 billion a year. Now this isn't all a Vietnam war either because we have troops in the native countries we have troops in many other places throughout the world in Korea and many other military stations. Now. If we recognize this fact we aren't going to do anything about tourists and this is a 2 billion dollar problem. We aren't going to do anything about investments of American businesses abroad because we say in the long run this really works to our advantage and let's admit that. But our troops are 4 billion plus and I don't see how we're going to reduce that immediately unless the Vietnam war ends. What do we do. In other words what. Let's go. Let's look at what's constructive
here. What kind of a program would you look for here. Mr. Littlejohn What would you recommend. Well recognizing we should do something. Yes. Well I certainly think that we there are government expenditures abroad that can be cut and that could be significant. I do think that we have got to do more to maintain a stable dollar in this country. If these are not effective then I think we've got to look at the monetary arrangements it seems to me that that we may have to let the gold flow out and that when it's all gone then it will be the fact that other countries will not want us will have an interest in stable exchange rate. Do I understand you correctly you said that our present gold supply in this country which is about 12 billion and down from about 25 you just let it go let it go until other countries that we would not miss not not buy it back.
And so that then it would they would have a responsibility also of maintaining a stable dollar exchange rate with their currencies. And I think of course naturally I'm not proposing this as a purely unilateral thing I think it's something we should discuss and work out arrangements. But the fact is it would then mean that other countries also had a responsibility and an interest in ensuring relatively stable monetary situation. But it was a white vote yes. But it seems to me that to let out our valuable assets abroad we can because gold is flowing is a it is a dangerous policy. Dr. Green would you subscribe to the proposal Mr. Littlejohn just made of saying well let's give up our gold reserve behind our currency and let anybody buy it any place in the world it wants to buy. Absolutely I really see no particular value in hanging on to our gold either for
domestic purposes or for international purposes. I can visualize very easily an international system based on the dollar without any particular tie to gold. I do believe that there has been excessive concentration in recent years over the liquidity of the international reserve problem and no one has been doing much work about their just mint program bubble and that adjustment mechanism and put it in a particular case facing us today. It seems quite evident that exchange awaits. Oh to be realigned your line between are currently between currency I don't mean visibly gold I mean between currencies and I have felt that ever since 1960 in 1960 the United States should have embarked on a program of letting several European countries which were having substantial surpluses eveil your purposes of what balance of payments I persist believe their currencies by about 15 percent.
Now there are very few countries that were experiencing these surpluses and I think such a policy would have been vastly superior to any devaluation of the dollar. Let's remember the exchange value of a currency that is not psycho son. There's nothing sacred about it. It shouldn't be changed all the time. But once in a while and conditions. Dictate it ought to be changed and I think such a evaluation would have been to the advantage of the system as a whole. Of the United States of their leave valuing countries themselves and of the rest of the worked almost closed down do you think that these kind of proposals are part of what you talked about a few moments ago and what Dr. Cronin just mentioned would lead to monetary stability of the world and bring about more stability and more trade and be really advantageous. Well I do. And more than that I believe that since there is nothing in the present program that really change changes the basic situation and there are some elements of it that we can it that we are bound to come to the
point when we mount we will be forced to consider just the kinds of oh why do we turn to a gun when you can do it in an orderly face other words for what you have been saying it seems to me is that the proposals now before Congress and some of the administration is already implemented are really going to stop gaps not gap measures that are not going to solve anything in the long run. And that what we really need to do is come up with a reworking of the entire system thats going to have a long range of facts that's absolutely correct. Gentlemen our time is up in the Business Roundtable and thank you very much Mr. Littlejohn Dr. Crane for being on the program. Participating in today's business roundtable where Edward Littlejohn vice president Pfizer international company and Mordecai crane and professor of economics at Michigan State University where the program was Alfred l c of the Graduate School of Business Administration at
Michigan State University. The topic for next week's Business Roundtable is business and urban problem guests on the program will be John R. Thomas Jr. assistant director of the employment practices for General Motors and M John Patani attorney with Vista volunteers in service to America. 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 an E.R. the national educational radio network.
Business roundtable
United States' international money problems
Producing Organization
Michigan State University
WKAR (Radio/television station : East Lansing, Mich.)
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University of Maryland (College Park, Maryland)
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Episode Description
Guests for this program are Edward Littlejohn of Pfizer International, and Dr. Mordechai Kreinin of Michigan State University.
Series Description
A program of current comment from leading members of America's business community.
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Host: Seelye, Alfred L.
Interviewee: Littlejohn, Edward James, 1935-
Interviewee: Kreinin, Mordechai Elihau, 1930-
Producing Organization: Michigan State University
Producing Organization: WKAR (Radio/television station : East Lansing, Mich.)
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University of Maryland
Identifier: 68-4-20 (National Association of Educational Broadcasters)
Format: 1/4 inch audio tape
Duration: 00:29:54
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