May 12, 1975
Page 13870
INTERNATIONAL ASPECTS OF MONETARY POLICY
Mr. MUSKIE. Mr. President, I ask unanimous consent that an article by William C. Cates which appeared in the Wall Street Journal on April 24, 1975, be printed in the RECORD.
While I do not necessarily agree with all the specific conclusions, the article does emphasize an important set of facts. The U.S. economy is complicated. Because it is so, fashioning economic policy must go well beyond the simplicities of the size of the deficit. Fiscal policy must be made in the light of monetary policy. Moreover, both fiscal and monetary policy must take into account the interdependence between the U. S. economy and the rest of the world. This interdependence has become more important in recent years as the industrial world abandoned fixed exchange rates and the oil exporting countries accumulated tens of billions of petrodollars. These broad issues will have to be considered as the Budget Committees and the Congress debate specific expenditure and revenue programs.
There being no objection, the article was ordered to be printed in the RECORD, as follows:
A GLOBAL VIEW OF "CROWDING OUT" (By William C. Cates)
Too many economists, pundits and politicians hold their strong views on American economic problems as if these were national in scope and treatment, with but an apprehensive backward glance at the balance of payments.
This parochial outlook has led us to mistakes of forecasting that have been embarrassing to say the least. Take the 1973 failure to anticipate the domestic inflation that would be caused by a devalued dollar. Or the failure to appreciate the impact on world – and therefore American – interest rates from massive British, French and other national borrowings in the Eurodollar market to finance oil imports.
If these forecasting fiascos were embarrassing, the narrow domestic calculations which now appear to underlie our policymaking for 1975 will lead us to nothing short of tragic disaster. For this year's big national issue is "crowding out," a slogan for the question: Will the burgeoning demands of the federal government to finance a $60 billion to $100 billion deficit preempt private industry's credit needs in the capital markets?
Those who say it will include The Wall Street Journal, in an editorial on March 13, and Treasury Secretary Simon, the only certified bond expert in the administration, who confidently predicts that long-term interest rates will not fall below 8%. Others maintain either that the economy will recover and stimulate tax revenues to close the predicted deficit or, minus a recovery, that private savings will rise and private credit demands fall. Whatever the merits of this debate, it is strictly local and it falls to include what has been happening and is likely to happen around the globe.
Imagine for a moment that the finance ministers of the industrial nations, horrified at the inflation of 1973, had gathered together at the close of that year to do something about it. Imagine further that they decided to ran a collective budget surplus of $70 billion by imposing an excise tax on all petroleum products. Imagine still further that they agreed upon an international collection agency to levy the tax and invest the proceeds at its own discretion in the bonds and bills of their various governments and in short-term bank deposits.
However much this may strain the imagination, it is what happened, minus the folderol of a finance minister's meeting. Of course, it was the OPEC oil producers who decided upon the "tax" and who have since served as a collection and investment agency. On a world scale their cartel ripoff has had the same fiscal effect as a collective budget surplus of the oil consuming nations in the same amount. According to the Keynesian textbook, it was bound to produce a worldwide depression, as it is doing.
NEAT, BUT ...
Viewing our problems as usual in purely domestic terms, we tell ourselves that last calendar year we had a modest budget deficit and that this year we will have a massive one. Neat but incomplete. Actually, 1974 saw an immense global budget surplus, with the Arabs as a Super- Treasury Department, and any calculations regarding the impact of this year's U.S. government deficit must as well be made globally.
Current thinking on the money supply is, once again, purely in domestic terms. Solons Reuss and Proxmire are demanding that Fed Chairman Burns keep M-1 marching to a congressional beat, reporting not only his results but his intentions. But this M-1 is a domestic figure, whereas the demand for credit that skewed up interest rates last year started abroad. Probably the supply of money that will make the difference this year will also come from overseas.
Fears in the financial community, hyped by the breakfast interviews of Secretary Simon, are that government plus private borrowing will create such credit demands that the Federal Reserve Board will be obliged to increase the money supply at a wildly inflationary pace to ensure that all needs are met. By this logic one can envision the scene as 1975 comes to a close: Government borrowing is at unprecedented levels; business is picking up and needs credit. Worst of all, mortgage money is insufficient for voters to buy houses. M-1, domestically measured, has been climbing at too modest a rate, and the heat is on Chairman Burns to get it up. A scenario for inflationary disaster.
Of course, there is one remedy that an omniscient and beneficent Congress can provide for such woes: credit controls. With the government preempting most of the credit available, it is only right that the remainder should be reserved for suitably and worthy and vote-getting purposes such as housing and small business. Speculators, whoever they may be and whatever their speculations, must be denied access to the remnants of available credit!
Such ideas already have been broached, but, however worthy, they will flounder on one rock: You can borrow abroad. The speculator who has been denied access to his friendly local bank need only pick up the telephone to London to get his loan on about the same terms. The cost of imposing credit controls in the United States is the total disruption of international financial flows, and we would do it at our financial peril.
The good old days when we dictated world's money supply, ended Aug. 15, 1971. Our thinking has yet to adjust. With floating rates we have become just one other nation, however important, and our economic future lies in tandem with the rest of the world. Specifically this means that instead of simply forecasting federal and local government plus domestic private financing, we must look at the potential credit demands of foreign official agencies and overseas corporations.
Many foreign governments no longer have access to the credit markets, and, with the deepening world depression, overseas corporate demand for credit should abate. On the supply side one must reckon not only with domestic savings but with capital accumulation abroad, including the still-massive Arab hoards of petrodollars. Any strictly domestic estimates of the demand for and supply of credit – even with an arbitrary assumption that so and so many billions of dollars will flow in from abroad – is bound to fall wide of the mark.
THE WORLD MONEY SUPPLY
Even more important, particularly when it comes to the make-or-break policies of the Federal Reserve Board, we must start thinking about the world money supply, for it is the world money supply that has been impelling and will henceforth impel or inhibit world inflation. The world money supply consists, for practical purposes, of the money supplies of the U.S., Britain, Japan, and those European countries whose currencies are generally acceptable for trade payments.
A vitally important part of this money pool is the Eurocurrency system, wherein offshore banks are creating unmonitored money. The only worthwhile survey of Eurocurrency creation is conducted annually by the Bank for International Settlements in Basel. If policymakers in the U.S. or in any other nation are to know what they are doing, they must, urgently, get weekly statistics on the cash and deposit liabilities of offshore Eurocurrency banks. When Chairman Burns reports to Congress on the money supply, his report should include not just M-1 or M-2, but Eurodollar growth.
This is not a plan for regulation of international capital markets. Those who have labored in the stony vineyards of the Capital Markets Committee of the OECD are aware that such regulation is next to impossible and probably undesirable. Getting information, on the other hand, is feasible and urgently necessary. For the reality is that the dollar supply includes Euro- and Hong Kong-dollars, which are just as green and just as rubbery and most of the time we don't know how many of these there are.
At some point this year the increase in government demand for credit will exceed the decrease in private demand. At least this is the thesis of "crowding out." Then the Federal Reserve Board, under congressional observation based on statistics of purely domestic money supply, will be pushed to print money to facilitate all comers. The U.S. money supply will soar. Foreign investors will shy away. The dollar will fall. And interest rates will rise to levels sufficient to compensate domestic lenders for impending inflation and foreign lenders for their currency risk – a la Brazil.
There is one alternative: An informed Congress could leave an informed Fed chairman alone. Calculations of M-1 (domestic) could already have been combined with a competent and current survey of the Eurodollar money supply. With the Fed unpanicked, increasing demand for credit in the United States would entice funds from abroad, causing the dollar to rise on the exchange markets and simultaneously filling the gap between savings and borrowing needs.
Which is it to be? The record of the past suggests inflationary chaos. Yet we need not always be lemmings. All that is required is a little better information, understanding and communication, plus a little willpower.