Sitting in my office one day, attempting to collect my thoughts for this evening, I caught the eye of Sir Thomas Gresham whose portrait hangs over my desk. It seemed to me that Sir Thomas was trying to tell me something about the theme of this convention! "Realism in World Trade and Investment." Gresham's law, expressed in but five words, "Bad money drives out good" reminds us all that money has no value except scarcity value which is a good compass point to keep in mind when sailing through the verbal storms of both the new and the old economics.

In addition to understanding clearly the problems of the domestic money supply, he was also one of the first realists on the subject of manipulation of foreign exchange rates. He wrote to his sovereign, King Edward VI, as follows:

"I did raise the Exchange from 16 to 23 shillings, whereby all foreign commodities and ours grew cheap; and thereby robbed all Christendom of their fine gold and fine silver. And by raising of the Exchange, and so keeping of it up, the fine gold and fine silver remains forever within our realm. -- Sir, if you will enter upon this matter, you may in no way relent, by no persuasion of the merchants. Whereby you may keep them in fear and in good order: for otherwise if they get the bridle, you shall never rule them."

Here, in short, is realism of a very high order. For what Gresham has done in a very few blunt words is to pinpoint the intimate connection between international trade, monetary fluctuations and nationalistic considerations.

In the next few minutes, then, I would like to suggest how we might apply some of the realism of Gresham to our balance-of-payments problem. To do this, we need to know what has happened, say, over the past decade; what we have done or failed to do about it and finally what would be a realistic interpretation of how we have reacted to the events of that decade.

Just ten years ago next month, the world took a giant step forward with the coming of meaningful currency convertibility in Western Europe. What we all know so well after the event, but did not realize then, is that the advent of convertibility marked the end of the so-called dollar gap, which, you recall, we had been told again and again was structural and unresponsive to classical remedies. That was the period when Europe spoke of trade, not aid; and there simply were not enough dollars to go around. The United States was supporting Europe with dollar grants, largely because their economies had not recovered from World War II. But as Europe recovered and convertibility was achieved, conditions improved steadily. By 1959, a remarkable upswing was underway.

Since the wartime and postwar controls were dismantled, the record has been nothing short of astounding. Both world trade and investment have more than doubled. What we used to call the European miracle came to be the American miracle as the decade wore on. With increasing affluence, however, our imports grew substantially and despite a continuing rise in exports, the trade balance withered away. The U. S. gold stock slowly diminished; our balance-of-payments deficit became chronic and reached uncomfortable proportions.

Succeeding national administrations have concentrated a good deal of effort on schemes for solving this problem, but with little success.

And so from year to year, we have steadfastly ignored many of the real causes of the deficit and resorted instead to ad hoc, controlling measures that quickly outlive their very limited usefulness. We established an interest equalization tax that still remains on the books for some inexplicable reason long after our interest rates have exceeded those that the tax was designed to counteract in other countries. And if we have failed in our efforts, it is surely not because our economy has misbehaved, but largely because the assumptions on which we have based our curative measures were unsound.

We seemed to have assumed that the major economic forces within the economy can be compartmentalized. We admit that money is fungible, but we act as if you can take five single dollars out of your pocket and say. this is an export dollar, this is an import dollar, this is a foreign investment dollar, this is a consumer dollar, and that is a tax dollar. When you do this, the economists will accuse you of a very naive, analytical trick. Nevertheless, this is the legerdemain of which many are guilty. Initially, there were some who believed that extra stimulation to our exports, a cutback in the tax-free goods brought in by returning American tourists, and some trimming of expenditures by military personnel overseas would do the trick.

But growing world prosperity attracted a flow of capital from the United States. And so the emphasis swung to the capital account and the interest equalization tax was introduced. Large capital outflows were then officially regarded as the major cause of our deficit. Because capital flows lend themselves too neatly to controls, to a great extent the major effort to bring our balance of payments into equilibrium has been directed at them. The reasoning was that if this one area could be restrained, we would ease or eliminate our deficit. After all, the trade account was in surplus.

Apparently, in economics as in history, those who do not read and understand it, are doomed to repeat past mistakes. A quick look in the history books would have shown us that Great Britain had a trade surplus in only two years during the century before World War I when she was the world's banker. England's offset was her large income from overseas investment. A short-sighted application of capital controls, therefore, threatens to reduce investment income, the item that traditionally balances the accounts of nations that are prosperous enough to export capital.

Moreover, in our search for solutions, we have assumed that we could make of perfection what William James called "the enormous flywheel of society." What we seem to have had in mind was a system somehow outside of political realities. There is little question that the rest of the world has learned to live off the U. S. deficit and to rather enjoy it. While the U. S. fought for more freedom in trade and pushed for the success of the Kennedy Round, others were busy building non-tariff barriers to our goods. The bureaucracies around the world were taking the approach of giving it to you in the big print, and taking it back in the fine print. They lowered the tariffs, but kept the quotas by one device or another.

In other countries they protect their surplus reserves. Where exports account for 15 to 25 percent of GNP, bureaucrats' heads would roll if the trade surplus virtually disappeared in the space of six months as ours has done this year. Thus, when the French economy blew up last May, the first step was to invoke immediate exchange controls which ignored the lessons of history and of course failed to stem the huge three billion dollar outflow. The veneer of liberal trade policy was paper thin! Happily the controls were soon lifted as cooler heads prevailed and it became clear the controls were not working. But they still lurk in the woodwork as the past few days indicate. In fact, there is no case of which I have knowledge where exchange controls have saved a currency from devaluation, or furnished any lasting solution for a deficit. They may forestall formal devaluation, but they are in themselves a kind of partial devaluation. In short, they preserve the image, but not the substance, of exchange rate stability.

It is also a painful fact, but no less the truth that continuation of the Vietnamese war represents a plus factor in the balances of payments of many of our world trade competitors. In the same way, the down-to-the-wire steel negotiations and the long-drawn-out copper strike of last year were also plus factors to the balance of payments of a number of our important trading partners around the world. To a considerable extent, we have been responsible for stimulating, indeed, overstimulating, the export industries of other industrial countries. Imports to the United States have soared by 53 percent in the last three years in contrast to a 27 percent increase in our exports.

But in talking about imports, let's not forget for a moment that when we trace them back to their origin, they represent capital investment in some foreign country; they represent jobs for people in those countries and they frequently represent a major element of that country's economy. It is understandable therefore, why other countries direct their major economic policies at enabling and encouraging their industries to compete as effectively as possible in world markets. Any opportunity to expand sales in those markets, because of a threatened steel strike in the United States, or because of an advantage in prices, will be acted upon promptly and aggressively. In the past two years, total world trade has grown by 13 percent. Sales into the United States market have accounted for 28 percent of this increase.

It seems clear that the starting point for realism in trade policy is a stable dollar, which is another way of saying that we must bring our balance of payments more nearly into equilibrium. In assessing the tools that are available to do the job, we should not over-estimate the strength of the invisible network forged by the central banks of the world. It has operated so effectively in supporting one country after another in order to give the national governments time to take truly curative steps. While this external help is useful, and indeed essential, the only people who can maintain the value of the dollar are Americans. Even our great strength is not enough to survive perpetually if we continue to flaunt the traditional rules of the game for too long a period.

It might be helpful to review for a moment the classic method of adjustment under the old gold standard, in order to provide a basis for judging some of the alternatives before us. Under the gold standard, a deficit in our balance of payments would have meant an outflow of gold. This, in turn, would have reduced the money supply of this country and in time would have reduced incomes and lowered our price level. Countries receiving the gold would have had corresponding increases in money supply, incomes, and prices. Therefore, Americans would have bought less goods and services from other countries,and the people of other countries would have bought more from us. Thus the deficit would have been reduced or eliminated automatically, without resort to controls or elaborate arrangements for international cooperation.

This automatic adjustment process is too rigorous for today's world. Deficit countries are unwilling to accept deflation; surplus countries do not want to inflate. Therefore, most countries insulate themselves as much as they can from the domestic consequences of fluctuations in the balance of payments. Our Federal Reserve System routinely offsets inflows or outflows of gold and other international transactions that might otherwise affect commercial bank reserves and money supply.

This digression on the state of the international adjustment mechanism is not meant to justify price inflation in the United States. That is an aberration that we must correct. I believe we can and will restore reasonable price stability in this country. Not overnight, but over the next few years. But that is the best we can do. If that is not enough to restore equilibrium in our balance of payments, it will be necessary to consider some alternatives. Furthermore, it seems only reasonable that, as we work on removing the price inflation obstacle to adjustment, our friends abroad should work on removing other obstacles -- the barriers facing our exports to many countries.

For you and me, who are participants in the contemporary scene, it is extremely difficult to discern when the world changes its direction. It would be a brave man indeed who would state unequivocally that the world is at a turning point, but it does seem to me that at least the United States has come or is coming to a fork in the historical road. The choice that is presented to this country, and indeed to the whole rest of the Western World and Asia, is whether we shall turn our backs upon the vastly successful policies which succeeded in doubling world trade in the last decade and move slowly and inexorably back into the dark jungle of exchange controls. The men who distrust freedom never sleep. They are always looking for an opportunity to control your life and mine, and to do it with the best of intentions. Usually we are told that controls are for our own good in a complicated and uncertain world. The origin of this idea in modern times was the dictator Mussolini who said, "We were the first to assert that the more complicated the forms assumed by civilization, the more restricted the freedom of the individual must become."

Our generation has grown up under what one might call the Marshall Plan mentality. This was entirely fitting and proper in the days and months and years after the conclusion of World War II. The immense problem of the developed and the developing countries still requires a lot of Marshall Plan mentality, but I suggest to you that it is no longer appropriate for wide areas of the developed world, both in Western Europe, Japan and in other parts of Asia. It is time perhaps to make clear to the rest of the world that the United States in its own national interests has to put its fiscal and monetary house in order as other nations have been telling us. If this causes some inconvenience around the world, it must be the tolerable price which must be paid in the longer run for the stability of all the trade and investment throughout the Free World. Those other nations should obviously understand that we must press for the lifting of the ineffective controls with which we have been saddled in this country, while at the same time we make clear that the United States will no longer tolerate the intricate bureaucratic means of preventing our goods and capital from going around the world.

Our negotiators can no longer accept excuses from our trading partners in the developed world that their industries need protection. The practice of Gattmanship which lowers tariffs but raises quotas, border taxes, and other more ingenious bars must be stopped. Our trading partners have largely come of economic age, and it is time both they and we conducted negotiations in line with the realities of 1968 and not 1948.

For our part, it is time to return to our traditional brand of American realism in order to maintain our financial credibility in the world. We could start from the premise that no one in this room believes in his heart that the United States in a dangerous world would permit its gold supply to run down to the last bar of gold. No nation, particularly the United States, could afford to find itself without international reserves in a world that turns over with every headline of every edition of the news. We must face the probability that at some point in time, the new Administration in this country will have to choose among several political alternatives.

The first is to re-examine whether or not the price of gold expressed in terms of other currencies is an ultimate fixed value like the speed of light, or whether revaluing gold in terms of other currencies might turn out to be the lesser of several evils. A fixed value of the price of gold has served this country and the world very well over the years. If it should develop that the alternative to keeping the price of gold at its present value is to turn the United States and the whole of the Free World back toward the morass of exchange controls, the new Administration may honestly question which route would be most desirable.

It is my belief that the level of the price of gold in and of itself is not so important as the fact that whatever the price of gold may be, the world does not expect that it will change greatly in relationship to most major currencies in the foreseeable future. In saying this, I want to make it crystal clear that we are not recommending that the United States revalue gold in terms of other currencies. I am merely pointing out that the world is moving down the track toward a decision date when the new Administration must decide what direction it will take toward getting control of our money supply and our fiscal policies. Will we listen to the siren song of the controllers who argue with great persuasiveness that if we put a control on capital exports, or we put a control on tourism, or we put a control on the price of every commodity or product you may be selling, an all-seeing, all-knowing bureaucracy can save us from our own faults? Controls have ratchet effects that grow tighter and tighter and are almost never released.

This is a continuing phenomenon even among many sophisticated people. In some countries in Western Europe, if you were to suggest that the telephone system or the utilities or the railroads or the banks should be operated by private enterprise, the men who appear to espouse freedom would tell you that this is impossible, as their economies would be unable to allocate the resources to make these industries grow. The lesson of the United States, with its relative freedom in these areas, is completely lost. Once you start down the road to controls, it takes an enormous effort of will and philosophy to find another route. I would remind the people in this room that when President Eisenhower took over the reins as Chief Executive of the United States, the U. S. had price and wage controls and most of his advisors and many economists said that if these were to be lifted, the United States would go into an economic tailspin. It is to his enormous credit that he did not listen to them, but instead cut the Gordian knot and freed our economy to start the greatest expansion in the history of the world.

If the world is not to turn back to World War II controls, which will bring more controls and thereby slow the world's economy and trade, we must speak with clarity and forcefulness and energy in the cause of free markets.

Even our strong tradition of a free society is no absolute protection if new institutions and policies of government cut away the very foundation of our belief in a free market. We have seen in the not too distant past the disastrous consequences when business seizes what looks like a short-run gain by supporting the concept of cartels. This was the foundation of Mr. Roosevelt's NRA, which was happily struck down by the Supreme Court. We must now beware that we do not repeat the errors of the 1930's and fail to perceive clearly the side effects of any economic wonder drug offered to cure our short-term trade problems, for the secondary consequences are often more dangerous than the disease itself. If you and I are persuaded that a quota or a tariff for our business will solve our temporary problem, we must understand that we are putting in train the secondary consequence of turning the world away from the course which has been so successful in the postwar world. It is time to look with a clear eye not only at our bargaining position in the world, but also inward to our own hearts.

If we follow the paths of free markets, our trading partners must walk with us and eliminate both the visible and invisible bars to our goods and capital. And, if the price of this freedom is measurable, it is still a far better course than returning the world to the chaos of controls and economic nationalism. Realism demands that we acknowledge this fact which was delineated by that legendary, ancient philosopher who summed up all known economic theory in just nine words. He said, you may recall, "There is no such thing as a free lunch."

Thank you.