No Royal Road: An Address

Wriston, Walter B.


Some years ago Winston Churchill said that "democracy is the worst form of government except for all those other forms that have been tried from time to time." My thesis here today is a paraphrase of Sir Winston's statement in that I believe it could be said that the dollar is the worst currency in the world except for every other currency which has ever been invented.

The dollar and all currencies are traded in a vast international foreign exchange market by a group of unsentimental traders, and their day-to-day fluctuations one against the other are a matter of record, gossip and moment. The foreign exchange market represents conflicting hopes and fears of the traders of the world, as well as the hard facts of international finance.

In our time we have the strange paradox that while more and more emphasis is being put upon longer and more intensive education, at the same time, human nature being what it is, we are continually looking for the quick, easy way out of our problems. We are bombarded with advertisements selling everything from instant shorthand to instant Spanish. We are led to believe that by listening to two or three phonograph records and exercising no or very little mental energy, we can somehow learn to speak a language or master electronics. This kind of instant solution to difficult problems is not new, but rather has been a sort of plaintive cry for centuries. You will recall that the young King of Egypt in the 3rd century B.C. complained to his geometry teacher, the great Euclid, that he had to apply himself in order to learn geometry and was favored with the classic response, "There is no royal road to geometry." What I am suggesting to you today is that even in an age of instant this and instant that, there is no royal road to preserving the value of the dollar. There is no intellectual wonder drug which we can take and then turn over to sleep peacefully secure in the knowledge that our currency is safe.

In addition to the emphasis on easy solutions to complex problems, we live in an age in which increasing reliance on the computer forces everyone to think in terms of numbers. The incredible efficiency of a modern computer is such that we tend to forget that the numbers it produces are no better than the information that is fed into it. The problem is deeper than this because the precise numbers that we look at in our balance of payments figures, for example, are at best a rough approximation of the true situation. The fact that the numbers are precise and finite tends to lull us into believing that the situation they are intended to represent is as clear and concise as the numbers before us. Actually, nothing could be further from the truth.

It is popular to suggest that the dollar is depreciating at a fixed rate every year, and there are cost-of-living figures to prove that today's dollar does not buy as much as the dollar ten years ago. Calculations can be made to demonstrate that today's dollar will buy no more than a quarter did in 1899 and no more than 50 cents did in 1941. This notion of a constantly eroding dollar is, however, subject to challenge on many fronts. Some of the erosion is explained by wars because part of the wastage of war is measured in wastage in the value of money. The cost-of-living index has risen about 14 percent over the past ten years, and this has been translated into an average rate of shrinkage in the value of the dollar of 1.3% a year. But the index measures fully neither the quality improvements in the products we buy, nor does it adequately reflect the range of goods we can purchase. I will never be persuaded that a 1964 dollar which can buy immunity from polio for your children and mine is a depreciated piece of currency as compared to a 1954 dollar which could not. Our dollar today can buy a cure for mastoid or measles, an electric heart, a journey to London in six hours in comfort, a telephone conversation bounced off a space satellite, and convenience foods which have wrought a true revolution in the home. The incredible variety and quality of products which are available today is not always reflected in the figures, and perhaps never can be, but that does not mean that they don't exist. In saying this I do not for a moment disparage the harm that has been done to pensioners and others on fixed incomes by the rising cost of living, but I do suggest that it is hard to find in this world a currency that has held its value better than our dollar. We do need to protect the value of our money by limiting the quantities of it which are created, but it is not entirely accurate to measure its depreciation solely in terms of a rising consumer price index. If this price index were, for example, to remain absolutely flat it would be a sign that rigor mortis had set in the American economy. Some nations have pegged and subsidized prices of products entering into the cost-of-living index and stood back to admire their work, but their currencies have depreciated against others in the world when measured against real values. The very composition of a cost-of-living index is in itself a constantly shifting mix in a dramatically changing world. Expert statisticians admit, when pressed, that it is difficult to measure changes in the cost of living between distant points of time. I suggest that it is almost impossible.

One of the great catch phrases of our time is the "revolution of rising expectations." While this phrase has been applied almost entirely to the developing countries. I suggest to you that part of the apparent depreciation in the buying power of the U.S. dollar is due to the fact that this revolution of rising expectations has one of its most active arenas here in the United States. Our expectations have risen to the point where an automobile is not a dream for the average family, and the number of families with second cars and even second houses is increasing daily. Part of the apparent depreciation of the dollar is a mental desire for a far higher standard of living than was dreamed of by the generation ahead of us. My father was born in a cabin in Wyoming Territory that had only a dirt floor and oiled cloth for a window, but he did not regard himself as underprivileged. Today you may feel poor if you don't have a television set, a dishwasher and many other appliances. Those who comment about the diminishing value of the dollar usually forget that most of our essential demands today were considered luxuries only a generation ago.

If you measure the depreciation of the dollar by the price of a haircut, a shoe shine or a car wash, it obviously has depreciated very substantially over the last twenty-five years. Anything with high labor content in the cost-of-living index tends to reflect this fact. On the other side of the coin, the huge outpouring of research and development has created products which tend to make the dollar appreciate. For example, if you study the average factory worker's wages in 1939 and 1964 and test what they will buy in those two years, some striking figures emerge. In 1939, for example, the average factory worker would have had to work 413 hours to buy a refrigerator of today's quality, while in 1964 he had to work only 102 hours. On the same basis he worked 271 hours in 1939 to buy an electric range and only 67 hours this year. This kind of comparison can be made for a wide range of products which are in daily use today with similar results.

Put another way, it is crystal clear that the contribution of business through innovations of products and methods has assisted very substantially in preserving and in some cases enhancing the value of the dollar, but this contribution is not always recognized nor even widely understood. What we are now asked to do by President Johnson is to hold the price line and "share your gains and productivity with consumers." The lessons of the past argue that we must all support the President's effort to persuade business and labor leaders to avoid a cost-push spiral. We must, however; beware of the illusion that there is profit for the workman and for the economy as a whole in wage increases running beyond the dimensions of productivity improvements.

Recently Mr. John Gardner suggested in his new book that the last thing a corporation does before it goes bankrupt is to issue a new Manual of Procedure. There is a great deal in what he says, because when a company or a country becomes intrigued and absorbed with the technique of doing something, it becomes easier and easier to forget what it is you are trying to achieve. Mr. Edward Bernstein recently pointed out,

"The problem of putting our payments in order, of strengthening the international economic position of the United States, and of assuring the stability of the U.S. dollar cannot be solved merely by rearranging statistics. At best, the refinement of our balance of payments statistics can give us somewhat greater accuracy in measuring the deficit, and the more logical presentation of the data can give us somewhat greater clarity in analyzing our payments problem."

While I do not suggest that the United States is yet in this position, it could be said that we have concentrated too much of our attention on some sophisticated techniques of masking the true state of our balance of payments. We take justifiable pride in the technical skill with which huge swaps, presently aggregating some two billion dollars, have been worked out with foreign central banks which are designed to cushion the effects of short-term capital flows. We admire the smooth operation of the London gold pool, the invention of the Roosa bonds and applaud the heightened cooperation between central banks. All of these things represent the new procedural manual and a step forward in the economic integration of the world and have already proved their worth more than once. These short-term tools, skillfully applied, can give us turn-around time, providing we keep clearly in mind that the fundamental problem is to preserve the value of the dollar, not only for the citizens of our own country, but because a sound dollar is the peg upon which hangs the whole monetary machinery of the Free World. The international economic scene is so complex and sophisticated and the air is full of so many learned studies about procedure, that it is regarded as almost bad form to go back to the basic reason of why money has any value. The only reason that money has value is because it is scarce. It is axiomatic that if everybody had all the money he wanted it would become worthless. In its simplest terms then, the debate about the ways to maintain the value of our currency must in the end get down to the fact that money must be kept scarce enough to have value and plentiful enough to serve its function in a growing economy. The judgment we apply to this problem is critical.

This phenomenon of the value of scarcity is just as true internationally as it is domestically. Since the war the many studies about international liquidity, filled with facts, figures and speculation, all arrived at more or less the same conclusion: that while international liquidity is adequate today, it is clear that in a few years time we would not have enough international liquidity. So far tomorrow has not come, but there are fresh studies in the works proving that it will come in a few years. With recent evidence of wage-price spiraling in Europe and elsewhere, the temptation gets stronger to devise a rationale for a system more tolerant of wage-price inflation. Cost control, whether public or private is not popular, yet these self-disciplines are essential to an orderly tree society. Our concern with balance of payment problems, therefore, cannot be limited to keeping a reasonable balance between nations, but must extend to the protection of the value of our money. If we take too deep a bath in international liquidity we may all drown.

There are several schools of thought which suggest that there are definite and exclusive ways to preserve the value of the dollar, if only we would follow a set path. Each plan is usually quite definite -- and each is different. Some economists blame our troubles on politicians and attempt to divorce economics from politics. One can question whether such an approach is a real policy in a real world or whether it is a make-believe policy in a phantom world. The only country that is founded and operated on so-called economic truths is Soviet Russia which is having great problems with its currency and economy. Man has always been a political animal and it is only through politics that we are governed. The management of money is part of the function of government. We must have the courage to manage our money as well as any other critical problem, for it is as much a part of the function of government as our courts, our Congress and our Executive.

One measure of our performance is reflected in our own balance of payments figures which have improved markedly in the first quarter. The private sector is carrying the load internationally just as it picks up the tax check domestically which finances our government. The surplus on our international trade in goods and services -- today and as far ahead as one can see -- is large: almost $8.5 billion at an annual seasonally adjusted rate during the first quarter of 1964 -- an all-time high. Admittedly, some of the exports under government aid programs are simply give-aways and represent no competitive triumph. But we still have the largest export surplus of any country in the world on strictly commercial account. Our surplus in terms of commercial merchandise trade stood at something like an annual rate of over $4 billion during the first three months of 1964. In addition, there is a sizable surplus on services -- which includes income on U.S. investments abroad and returns to foreigners on their investments here as well as shipping services and tourist outlays. Our trade surplus and other receipts have not until very recently been able to balance the huge outpouring of government funds which gave us balance of payments deficits aggregating about $21 billion over the last six years if we exclude special transactions.

These balance of payments deficits have not brought about a decline in the nation's wealth as measured by foreign assets. The increase in our new long-term private investment abroad since 1950 has roughly matched the loss in our gold stock and the additions to our short-term liabilities to foreign nations. U.S. private investments abroad, our gold stock, exceed holdings of foreign countries and international financial institutions here by some $30 billion. The rub is that while most of our assets are long-term, two-thirds of our sharply increased liabilities are short-term, but nevertheless our nation's balance sheet is strong.

A balance of payments problem of the magnitude of that of the U.S. obviously attracts a great deal of analysis and suggestions. One group of economic theorists has been concentrating on an expansionary monetary policy on the hypothesis that this would stimulate our domestic economy. The group quite naturally feels frustrated by the discipline imposed by our balance of payments. These people would like to have the balance of payments problem go away and leave them alone. Proposals are also propounded to "demonetize" the $29 billion of short-term claims by foreigners on the U.S. dollar. These claims are not phantom entries in an academic ledger, but represent real resources which were given up by our trading partners in return for the claims. It is not realistic or even honorable to ask our trading partners to give up their right to exercise these claim at some future date in order to vitiate the discipline of our balance of payments.

In the end there is probably only one principle upon which you can get agreement among knowledgeable people and that is the principle of scarcity. Everyone admits that if money is too plentiful it loses its value, but the sticking point in the argument is how much monetary ease is appropriate. Once again I would return to the basics of the situation and not be confused with the sophisticated arguments built upon doubtful premises which circulate so freely today. If we reduce our balance of payments position to our family situation, the principle is well illustrated. If your wife spends more than you earn you have a limited number of choices. First, you can draw on your savings to pay your bills. Second, when your savings are exhausted you can then borrow money to finance your deficit, and the third alternative, which is the hardest of all, is to persuade your wife to stop spending more money than you make. This last alternative is quite often rejected out of hand, both on the personal and the national level as being totally unrealistic. If you are a government like the United States of America, you have one other option not available to you as an individual. That is to create the money to finance your deficit. It is precisely for this reason that government deficits have to be handled with care. The fine balance between creating too much and too little liquidity in an economy which is moving and expanding in a changing world is the challenge faced by our monetary authorities. And their monetary policy must act and react on our domestic fiscal policy and our international posture and commitments.

In the last analysis the strength of the dollar rests upon the productive capacity of the United States of America. Some cry alarm at the first sign that the dollar is under pressure in the exchange markets of the world, forgetting the relative magnitudes of our economy as compared with those of other currency areas. The dollar today enjoys the confidence of the world. Whether or not our currency will continue to merit this confidence is entirely in our own hands. The battle to maintain the stability of the dollar can never be won as it is a continuing struggle. It can be lost, however, through sustained imprudence. Balance of payments problems are endemic to a free society and are part of the cost of dynamic progress. In a theoretical world of tightly regulated production, consumption, income and prices among the nations of the world, balance of payments problems could be avoided. Hopefully we do not live in such a world, and our success in maintaining the value of our currency will depend on keeping our eye on the main elements which earn it the confidence of the world and the fortitude to take prompt action to redress temporary imbalances as they develop.

  • The document was created from the speech, "No Royal Road: An Address," written by Walter B. Wriston for the 48th Annual Meeting of the National Industrial Conference Board on 21 May 1964. The original speech is located in MS134.001.001.00022.
This object is in collection Subject Temporal Permanent URL
Component ID:
To Cite:
TARC Citation Guide    EndNote
Detailed Rights