Wriston, Walter B.
Over four hundred years ago a coin was minted in the valley of St. Joachim. It was known as the "thal," later as the "thaler," and still later by the Dutch as the "daler." The very word "dollar," therefore, is part of the history of your country. No one could come to Vienna to talk about the United States dollar without recalling this as well as the fact that, long before the currency of my own country gained international stature, Maria Theresa gave her name to a dollar coin which is respected and used down to this day. Unlike many other currencies, the Maria Theresa dollar, first minted I believe in 1780, has a value that depends on the integrity of its silver content and is unrelated to the economic fortunes of the country from which it came. Almost five years before Maria Theresa minted her first coin, the Continental Congress of what became the United States of America, authorized the first issue of paper money on quite a different basis. These dollars, known as Continentals, did not retain their value very long. In January, 1779, eight Continental dollars were equivalent to one in silver, and by November of the same year they had dropped to 38 1/2 to one, and in March the following year Congress officially established the ratio as forty dollars in paper to one Spanish dollar. Only one year later one Spanish dollar could buy up to one thousand Continental dollars. This unfortunate experience with paper currency, which gave to our language the phrase "not worth a Continental," so influenced American monetary thinking that our central government did not issue any paper money for eighty years.
All nations tend to react to new situations using their experience in the recent past as a guide. It was not until very recently that Americans have thought much one way or another about the international value of the dollar. From 1934 to 1941 there was a massive inflow of gold to the United States aggregating more than $15 billion. This gold inflow reached such proportions that at times the total short term foreign liabilities of the United States were covered more than six times by gold. Quite apart from the technical statistical strength of the dollar in the immediate postwar years, the insistent talk about a dollar shortage by the rest of the world served to reinforce Americans' regard for the worth of their own currency.
It would not be an exaggeration to say that for a quarter of a century little or no thought was given to the possibilities or dangers of an adverse balance of payments. Our monetary authorities planned their moves without taking into consideration any effect that their efforts might have on our balance of payments. With the end of the war came the huge problem of reconstruction. My country instituted massive aid programs designed, in the words of General Marshall, "to restore a working economy in the world." This aid program was conceived and undertaken to help other nations' balances of payments and without much analysis of its effect upon ours. Today the awareness grows that we cannot carry the burden of the underdeveloped countries alone, but we must look more and more to the beneficiaries of our decline in reserves to pick up shares of the aid.
Since 1950 the United States has had an overall deficit in the balance of payments of over $21 billion. This deficit was settled by the transfers of over $6 billion of gold, and the balance of some $15 billion represented an increase of short term claims against my country. Although this outflow was persistent and certainly of massive proportion, there were very few of my countrymen, other than technicians, who viewed it as any threat to the dollar. As in many phases of human activity, we often need a dramatic event to remind us once again that fundamental principles must be observed to preserve human freedom or honest money. Thornton Wilder, an American playwright, has one of the characters in his play, "The Skin of Our Teeth," remark that "Every good and excellent thing in the world stands moment by moment on the razor-edge of danger and must be fought for." This is true of currency, liberty or life itself. The fire bell in the night which awoke the American people to the peril to the dollar was the forty dollar an ounce price for gold in the London market last October. The fact that the amount of gold which changed hands at this price was insignificant in relation to the gold stock of the world or that the price could have been held had our government chosen to supply gold to the market were details that failed to come through the headlines. This event, however, shook our citizenry into an awareness that there was a market in the world which in effect had devalued the dollar. The American monetary authorities have cherished the theory that monetary gold should stay in official hands. The London market, in effect, tested the theory and showed that it was untenable.
During the run on the American gold position, which has since abated, it was popular to ascribe our problems to the fact that we had priced ourselves out of the market and that American industry was no longer competitive. This diagnosis of our illness was over-simplified. It was an easy answer to a complex problem. It was difficult then to determine the competitive position of American exports since large sections of the world erected barriers against the imports of dollar goods and continued to sustain these barriers long after the need which prompted their building had disappeared. Even today, despite the progress which has been made in dismantling trade barriers, there are many American products which are denied markets abroad through discrimination and quotas. The advent of lower tariffs and quotas has assisted us in increasing our exports both in absolute volume and in the diversity of their make-up. Naturally we cannot compete effectively with every product in every market, but we can and do provide a myriad of products and services which are highly competitive. Almost from the beginning of our history when people spoke of Yankee ingenuity they were referring to our penchant for new products, new processes and new ways to invade markets. Yankee ingenuity is not a dead historical concept. It is alive today. American corporations will spend more than $10 billion this year on research and development, which will produce an outpouring of new products and goods in search of markets. This modern spirit of Yankee ingenuity combined with a new awareness of the competitive forces at work in the world in which we live will, I am confident, go a long way in taking care of our export problem.
The figures on the American balance of payments position are improving. Secretary of the Treasury Dillon estimated that the basic deficit, excluding short term capital movements, for 1960 was about $1.9 billion against a gross national product of $504 billion. The basic deficit this year will probably be approximately half that figure.
The figures which have not been followed as closely and are perhaps less understood are those of the balance sheet of our international assets and liabilities. Our nation's foreign assets aggregated some $86 billion at the end of last year as against our international liabilities of some $44 billion. Included in our assets are gold, the holding of foreign stocks and bonds, government loans and credits, but the largest factor is private direct investment abroad. Our private foreign investment has a book value of some $33 billion which understates its real replacement value very substantially. Our liabilities are represented mostly by foreign held U.S. Government securities and other short term paper and deposits, but foreign interests also now have almost $12 billion in portfolio investments and direct investments in American industry amounting to about $7 billion. If we look only to the short term, the United States is a net debtor. If we take the longer view, we see that our international assets exceed our international liabilities by some $42 billion, which is impressive evidence of the basic international solvency of the United States. The figures on a balance sheet are a snapshot taken at a given point in time and can reflect only the position of the moment. The key factor in appraising any company or currency remains the skill of the management. We have now passed through a recession and are moving into a business upturn while at the same time we are becoming aware of the fact that our economy is beginning to resemble a semi-garrison state. The key question in the months ahead is the philosophy which will control our government financing. If it is financed out of taxes and true savings we will be on a sound footing, but if our government listens to the siren song of the printing press we shall all face difficult times. Almost every country in Europe has in its recent history learned the hard way that the control of the money supply is one of the key factors in preserving the value of its currency. A currency must be defended both internally and externally. Monetary policy alone cannot do the job. We must learn the lessons of the dramatic postwar recovery in Europe, one of which is that inflation cannot be equated with growth. The growth in Europe has been spectacular during a period of reasonable price and wage stability. In this achievement European experience merely reaffirmed the economic history of my own country in the thirty years which followed our Civil War a century ago. During our Civil War the price of wholesale commodities doubled, and this inflationary period was followed by a reaction in the postwar years. Following the Civil War our wholesale prices declined for thirty years while our gross national product is estimated to have quadrupled in real terms; our annual growth rate approached 5% compounded.
No one doubts the vast productive power of the United States economy upon which rests, in the ultimate analysis, the value of our dollar. No one doubts either that we have both the capacity and the techniques to defend the dollar. It is fair to say also that we have rejected the protectionist answer to the problem and have determined not to reverse the trend toward free international commerce.
If we grant that the United States has the capacity and the skills needed in the continuing battle to defend the dollar, the real question comes down to whether our nation has the desire and the will to do those things which are necessary to maintain our strong position. Since the margin between success and failure is so small in the balance of payments battle, the amount of discipline to which we must subject ourselves is relatively small in relationship to our overall economic picture.
The discipline which is applied to our economy comes from three main areas. First, as in all democracies, we rely upon the force of self-control. The basic prudence of the American people has been proved over and over again. In my own bank we have made over $5 billion of small loans to the working people of the City of New York, and again and again when the economic climate has changed for the worse the small borrower ceases to expand his debt and begins to repay it. In a small economy or a small economic unit the results of imprudence are immediately felt. If you and your wife spend more than your income the overdraft at the bank shows up immediately. Similarly, in a small country the enlargement of the money supply is almost immediately reflected in the loss of reserves. In a huge economic unit like the United States it takes a longer time for imprudence to become apparent, but nevertheless there is a growing awareness that we must discipline our own economy. This fact was given official recognition when the President in his speech on Berlin on July 25 pledged that the budget for fiscal '62-'63 would be in balance. Our record in this regard is not too bad. With the benefit of hindsight it becomes apparent that we overdid the corrective measures during the recession of 1957/58 and put too much money into the stream. In the recession through which we recently passed our authorities used more restraint.
Secondly, we are subject to the discipline of what has been described as the international gold bullion standard. We have a gold policy which is unique in the world and, although it is popular in some quarters to believe that gold has outlived its usefulness, the fact is that it was the flurry in the London gold market that alerted the nation to the peril to its currency. This event was just another practical illustration of the fact that the movement in a nation's gold reserve performs the function of an early warning radar system. Last year when the alarms about the dollar were widespread many suggestions were made to repeal the law which requires our Federal Reserve Banks to keep gold certificates equal to at least 25% of their note and deposit liability. The idea behind this was to make all of our gold available to cover short term foreign liabilities. Actually, the entire United States gold stock of $17 1/2 billion is already available to cover our foreign liabilities since the law permits temporary suspension of the 25% note and deposit cover in case of need. There is no magic ratio between gold reserves and foreign liabilities, but it is clear that our present gold reserves are entirely adequate and we should be willing to use them whenever the dollar is attacked. President Kennedy gave unequivocal assurances on this point and expressed the determination to keep the $35 gold price and pledged to use "the full strength of our total gold stocks...as needed." The need to maintain an adequate gold reserve exercises an automatic discipline upon our economic thinking. The existence of the international gold bullion standard brings pressure on our budgetary and monetary practices by constantly reminding our authorities and our people that they dare not frame their domestic economic and financial plans without taking note of possible repercussions of their acts abroad.
The third discipline to which we are subject is that we live in an increasingly competitive world. As the barriers to trade have gradually been dismantled and the impediments to capital flow reduced, money now moves easily between nations. There is a large sum of short term capital that owes no allegiance to any nation and moves toward higher interest rates or away from a deteriorating economic situation. In the free world in which we live today the easy movement of this capital exercises a quick discipline upon our thinking by dramatically spotlighting the situation.
In thinking about the position of the dollar today we would do well to remember that for a quarter of a century self-discipline has been the only real restraint upon our economy. In the year 1961 we are feeling and reacting to the discipline of our gold bullion standard as our reserves have declined and are keenly aware of the discipline imposed by an increasingly competitive world. The dollar, like every good thing, does in fact stand on the razor-edge of danger and must be fought for. The strength and effectiveness of these disciplines is not always as rapid as we would wish, but over a period of time they exert very real pressures which work effectively to sustain the value of the dollar today.