DECEMBER 16, 1971
The World Monetary System: A Pattern for the Future
AN ADDRESS BY David Rockefeller,
CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE OFFICER, THE CHASE MANHATTAN BANK
CHAIRMAN The President,
Henry N. R. Jackman
Members of The Empire Club cannot help but have noticed that we have more than our usual number of bankers at the head table today. This is one of those rare occasions when the chief executives of Canada's chartered banks come together and where their smiling countenances hide what is perhaps otherwise a very fierce competitive spirit. You will also have noticed that we have our Provincial Treasurer, Honourable Darcy McKeough and two former Ministers of Finance here with us as well.
Speaking of Ministers of Finance, one automatically thinks of income taxes. Members of The Empire Club are no doubt aware that we are very rapidly approaching that time in the new year when many members of our Club contemplate, often with some trepidation, making that annual pilgrimage to their friendly banker in order to raise the necessary sustinence to satisfy the insatiable appetites of the Department of National Revenue.
I am happy to be able to announce to you that your friendly bankers will once again do their very best to effect this happy reconciliation between members of The Empire Club and the revenue departments--but as far as this meeting is concerned, you are allowed to look, but you must not touch. All formal approaches must be made through regular channels.
Our guest today is Mr. David Rockefeller, Chairman and Chief Executive Officer of the Chase Manhattan Bank. He comes to us at a time when Canadian-American relations are perhaps experiencing one of those rare periods of strain, that always characterize a relationship which is basically warm and enduring.
As our good friend Walter Gordon can confirm, David is not the only banker by the name of Rockefeller who has ever paid a visit to Canada.
One recalls the story of the western pioneer farmer, who in those early days homesteaded a quarter section on the boundary between Saskatchewan and North Dakota. He spent almost his entire life not knowing which side of the border his farm was located on. Finally, when the International Boundary Commission completed their survey, he was told that his homestead was on the American side. When informed of this he thought about it for a moment, paused, and then said, "I'm so glad--I always heard it was so cold up there in Canada."
I hope, however, our guest will not find the climate too cold for him during his visit, and I know I speak for all of you when I wish him the warmest of possible welcomes.
David Rockefeller was born in New York City, educated at Harvard; The London School of Economics and the University of Chicago, where he received his doctorate in economics. At a very early age he exhibited a strong interest in public service, and on graduation became the Private Secretary to the great reform Mayor of New York City, the late Fiorello H. Laguardia. In 1942 he enlisted as a Private in the United States Army and served with distinction in North Africa and France, being discharged as a Captain and receiving the Legion of Merit; the United States Commendation Ribbon and the French Legion of Honour.
On his return from the war he joined the Chase National Bank and rapidly assumed positions of increasing responsibility. When the Chase National joined with the Bank of Manhattan, he became an Executive Vice-President of the combined organization, becoming President of the Bank in 1961, and Chairman of the Board of Directors and Chief Executive Officer in 1969.
During his career with the Chase Manhattan, Mr. Rockefeller gained a world-wide reputation, not only as one of his country's leading bankers, but as an articulate spokesman on business, international and community affairs. He has first and foremost insisted that the Bank which he heads continue to be a good corporate citizen.
It goes without saying that there are many success stories in American business and the story of David Rockefeller is certainly one of them. But what makes our guest today stand apart is his deep felt conviction that the constituency of a great corporation must be broad enough to include service to the entire community, including those, and yes--perhaps especially those--who are less fortunate, so that the promise of America can become the reality of mankind.
He, perhaps more than any other, typifies the best traditions of American business, and for this reason I have the very great honour to present to you Mr. David Rockefeller, Chairman of the Board of Directors and Chief Executive Officer of the Chase Manhattan Bank.
MR. DAVID ROCKEFELLER:
It is a great pleasure for me to be back in Toronto, enjoying your traditionally warm hospitality and exchanging views in these congenial surroundings with so many good friends and neighbors to the north.
My observations here today will be primarily those of a banker and a concerned student of international affairs. In a way, it is entirely appropriate for me to offer my views as a banker here in Canada because it was a uniquely Canadian influence that guided me to the banking "persuasion".
Shortly after completing my formal schooling and before I had yet narrowed my interests to any specific career, I sought out a conference with a man who was a close friend of my father's and whose judgment I and the world greatly respected. With characteristic courtesy he listened to my general statement of concern and ambition and then counseled me to go into banking. This was hardly what I had expected from a man who made his own invaluable contributions to society in the field of government service. But, as you can see, I found him most persuasive. So, to this day, I am deeply indebted to your very distinguished former Prime Minister, William Mackenzie King, for his thoughtful and perceptive counsel.
For a few minutes I would like to review the underlying reasons for the deterioration in monetary conditions that has occurred over recent years. Then I would like to offer my own observations on the uncharacteristic strain this has placed upon world economic ties in general and especially upon the traditionally close ties between our two countries.
Finally, with this week's announcement of the impending devaluation of the U.S. dollar fresh in our minds, I would like to propose some additional ways of restoring a more flexible monetary system--a system that would reflect changes in the world economy since the days of World War II and would be better adapted to our needs in the 1970s.
There is scarcely a meeting of bankers, businessmen or government officials anywhere in the world today, from Camp David to Ottawa and from Rome to the Azores, that doesn't turn to a spirited examination of the monetary crisis in one form or another. This year's meeting of delegates from the International Monetary Fund nations provided a particularly vigorous exchange. Those of us who attended the session in Washington were reminded once again of the critical interlocking role that money plays in the economies of nations and trade relations between them. The dependence of business prosperity on monetary stability was frequently alluded to. There was unanimous concern about the impact of unilateral economic adjustments on employment, prices and profits in other countries--since all of these elements are closely tied through international exchange rates.
Many of those present condemned President Nixon's economic moves of last August 15 as brazen beggar-thy-neighbor policies and ominous harbingers of neo-protectionism.
I believe that these interpretations miss the point and reflect too much concern with surface symptoms and not enough with an attempted preliminary response to the underlying cause of recent global monetary disorders.
Certainly, there is nothing to be gained by trying to assign blame for the monetary ills we have been suffering from. They have arisen from a complex set of causes. The task is to deal with them calmly and collectively. Discordant voices from all sides only confuse the diagnosis and delay progress toward a cure.
As a first step we should all agree to tone down such unproductive rhetoric so that we can concentrate on ending the series of crises which in the past few years have put in jeopardy the unity and stability of the world's economy.
After that, the primary task, as I see it, will be to utilize our combined wisdom and energies in restoring greater and more lasting certainty to international exchange and trade.
President Nixon's new economic plan has produced protest around the world. Two features, in particular, have provoked an unaccustomed abrasiveness across the Canadian-U.S. border--specifically, surcharging by 10% certain categories of U.S. imports and restricting the tax credit on investments to U.S.-made machinery and equipment. So far as I can determine, the suspension of the convertibility of the U.S. dollar into gold, which the President also announced, has not generated as much criticism either in Canada or abroad. The international consensus seems to be to accept this move as having been necessary and, indeed, unavoidable under the circumstances.
It must be recognized that these measures, together with the imposition of a temporary wage-price freeze, were taken at a moment when a severe monetary crisis was threatened and were designed to control a runaway domestic inflation and to improve the U.S. balance of payments position. Such drastic steps were taken only after a stubborn inflationary wage-price spiral had failed to respond adequately to traditional fiscal and monetary restraints. Moreover, the U.S. balance of payments deficit had reached truly alarming proportions. At the time of the President's move, the U.S. was in the midst of a third quarter which proved to be the worst in our history, posting a balance of payments deficit in that quarter alone of over $12 billion. This was more than double the deficit in the preceding quarter and was higher than the deficit suffered during any preceding year.
The point I would like to underscore, however, is not the adverse impact that such an imbalance has on the U.S. domestic economy, but the very real threat it represents to the world's overall financial and trade structure. The world may well question the propriety of there being any one country whose internal economic stability and non-inflationary growth are essential ingredients for the recovery of a healthy international monetary and trading climate, but this is nevertheless the case at the present time.
Such a role fell to the United States following the Second World War because it was the only country with sufficient productive capacity to generate the material and financial resources required for the post-war reconstruction of Western Europe and the Far East. This role was formalized at Bretton Woods where the relationship of the U.S. dollar to gold was fixed and other national currencies were tied at fixed parities to the U.S. dollar.
In retrospect, it now seems clear that the Bretton Woods monetary system, though it did serve the world well by providing the financial mechanism which facilitated more than two decades of unprecedented world trade, investment and economic growth, nevertheless contained a fatal flaw. Because the U.S. held such a preponderance of the world's gold stock at the time, it took for granted that the depletion of our stock would never constitute a problem. In short, it did not foresee the possibility that we would suffer from persistant balance of payments deficits in the magnitude we have experienced.
Over a twenty-five year period, because of economic assistance, military assistance, large scale capital investments and a deteriorating trade balance, there came to be a surplus of dollars where once there was a shortage. These surpluses found their way into foreign central banks where they became claims against U.S. Treasury gold. When larger claims were outstanding than could be paid for in gold, the world monetary structure began to weaken.
Attempts were made to prop up the system with an assortment of agreements, controls, and a proliferation of U.S. balance of payments restrictions, but these were palliatives which could not correct the basic weakness of the system. Finally, last August, President Nixon had no choice but to suspend the convertibility of foreign held U.S. dollars into gold. Thus, dollar inconvertibility into gold came internationally some 37 years after President Roosevelt suspended domestic dollar convertibility in 1933. In effect, the suspension of gold for domestic monetary purposes at that time was a kind of Phase I in the continuing momentum toward the eventual world demonetization of gold. Phase II came last August 15. At this point, once an interim settlement is reached, it behooves us to reexamine the whole system of international monetary arrangements.
In the meantime, a stabilized and healthy U.S. domestic economy continues to be important to prevent further deterioration of world monetary relationships. In the interest of expanding trade and healthy economic growth it is just as important to the rest of the world as it is to the U.S. that we stabilize our prices and wages and resume a normal rate of expansion.
At this point, I would like to turn to the matter of Canadian-U.S. economic relations and, in particular, to the difficulties posed by the U.S. new economic policies.
The long-term benefits to the world trading community from an improved international monetary and trading climate apply with added force to Canada because of your proximity and close economic ties with us.
It is perhaps because of our very closeness that we sometimes tend, almost unconsciously, to think of our economic relations in a bilateral rather than a multinational perspective. It is understandable, therefore, that a number of concerned Canadian spokesmen have tended to interpret the President's new policies not so much in terms of the eventual international benefits to be gained, but in the perspective of possible immediate problems for Canada.
Your concern over a diminished trade balance with the U.S., a possible rise in unemployment or a relapse in your gradual recovery from inflation has struck a sympathetic chord with many of my countrymen since we are currently embroiled in these same problems. I am deeply gratified to note, however, from more recent reports that the effect of the new U.S. policies on the Canadian economy has not been so alarming as initially anticipated. This is due, in part, to certain timely internal actions taken by your government, including the adoption of new tax benefits and public works expenditures, as a safeguard against internal economic setbacks.
The net effect, we are pleased to see, has been the slow but steady recovery of your economy, with a continuation of the trend toward an easing off of inflationary pressures.
Though it is still a bit too early to form firm judgments, preliminary indications are that the U.S. new economic plan will work a similar turnabout for us and will get our economy onto a sound productive basis again by next year. Certainly, we still have serious employment problems in both our countries and specific bilateral agreements such as the 1965 auto pact and various energy resource development accords will continue to receive special attention. But I believe it is fair to say that our domestic economies are now stronger and our mutual understandings of one another's problems are now greater than they were only a few short months ago.
With regard to Canada's action a year and a half ago in floating its currency, and allowing it to reach more realistic parity with the U.S. dollar, I think this was a very constructive step. Indeed, it was a forerunner of what others eventually decided to do.
For the sake of greater certainty in business planning, however, I would hope that, with a settlement, Canada would return to a fixed rate. In the past, our two economies have benefited greatly from the close integration of financial and commodity markets. Canada may have gained some advantages by floating its currency during a period of exceptionally high inflation in the United States, but it is by no means clear that this would remain the case after we have restored better economic performance in my country.
Having reviewed the background to our current monetary disorders, and the effect it has had on the special relationship between our two countries, I would like to conclude by offering my own thoughts on where we might go from here.
What is required for the short term is a negotiated accord on a satisfactory realignment of exchange rates. I am very much encouraged that this has been brought closer with President Nixon's acceptance of the need for a moderate change in the official relationship between the dollar and gold as part of an overall monetary accord.
This accord should include plans for defense burden-sharing and adjustment of investment and trade barriers including the U.S. surcharge and the "Buy American" provisions of the investment tax credit. I think we should recognize that this will necessitate concessions by all of the participants in the negotiations.
Admittedly, there are some issues which cannot be quickly resolved. These will require further study and negotiation, leading to a broad restructuring of financial, and trade arrangements. Certainly, the recent meetings of the Group of Ten nations and the summit meetings with your Prime Minister and President Pompidou have provided heartening groundwork for such restructuring.
Once a semblance of order has been restored in the world monetary system, we should turn at once to the more complex long term challenge of developing a general accord on fundamental revisions of the monetary and financial structure. Perhaps wider bands of permissible exchange rate fluctuation for temporary periods will be necessary. This would allow for greater independence of monetary policy as may from time to time be necessary, or for the adjustment of payments imbalances in certain cases. We should also work toward agreement on a set of new reserve arrangements which would strengthen and bring to the fore some variation of the Special Drawing Rights, or SDRs, the so-called "paper gold", created by the International Monetary Fund. Before raising the monetary status of SDRs, however, some public education will be required. According to economist Henry Wallich, there are few people who fully understand SDRs because so many who tried went insane. Briefly, to borrow his working definition, SDRs are banknotes issued by the International Monetary Fund to be used only by central banks and government to pay for payments deficits.
It seems to me that, with appropriate revision of existing monetary arrangements, SDRs could be used not simply to supplement key currency reserves and gold, but more importantly in the longer run, to supplant them. This is not to say that dollars will be displaced by the SDRs in all of their important market functions. But some countries may prefer another asset in place of some of their central bank dollar balances, particularly as the dollar is unlikely to be restored to gold convertibility--even theoretically.
A corollary, but longer-term objective, in my view, should be to devise a system which will make possible an increased scale of aid to the less-developed nations, improve the process of adjustment to international changes through greater use of fiscal policy, and remove barriers to trade and investment. Liberalization of trade arrangements--with uniform international safeguards and rules of the game could open broader markets for all countries. In the evolution, certain countries, such as Japan, would have an opportunity to revise their own priorities and gradually shift their emphasis from trade surpluses to meeting the social as well as the infrastructure needs of their growing domestic economies.
In prescribing the removal of barriers to trade and capital flows, I do not mean to exclude the United States, which clearly must also show a willingness to negotiate reasonably on trade concessions, and not expect that all the dropping of barriers will be done by others.
Even with the best of solutions to broad issues of international payments and trade, the changes which are inevitable will pose difficult transitional problems for individual industries and companies where final arrangements must be credible to labor and sensitive to a variety of other concerns. An agreement on trade adjustment procedures might well be added to the list of overall objectives. The goal should be not to avoid such adjustments, but to learn to roll with the punch. What is needed is a new set of rules for all countries which provides time to accommodate to necessary economic adjustments. In the years ahead, all trading nations will remain potentially vulnerable to a sudden inundation of specific markets. We need to work on an orderly and efficient way of shifting our capital and labor, so that all may benefit from a prospering world economy.
While the Group of Ten leading industrial nations are deciding on the right tactical steps for resolving immediate problems, I believe we should seriously consider establishing an International Commission to formulate the longer-term strategies for improving the world's overall monetary, trade and investment relationships. This Commission might address itself to a redefinition of official currency parities in terms of a new international currency unit, perhaps SDRs. It might also consider reforming the role of internationally-created central bank reserve assets. Hopefully, it would also examine more thoroughly the possible advantages and disadvantages of widening, or even narrowing, exchange rate margins.
While it is unrealistic to assume that all our monetary problems can be solved quickly, it is nevertheless essential that we lose no time in moving ahead. Protectionism is not a patient infection. Failure to eradicate it promptly could lead to a widespread epidemic of new barriers against trade and investment which, in turn, would have a sharply adverse effect on the health of domestic economies everywhere. II business slows down and unemployment rises, governments will become increasingly hesitant to inflict painful remedies on their own economies by making upward adjustments in the value of national currencies. The inward-turning virus of protectionism and a self-defeating nationalism will have more time to take hold. So the sooner we can reach agreement on the preliminary stages, the better it will be.
In this connection it may be appropriate for me to mention my concern not only with the growing forces of protectionism which threaten international trade, but also my concern with the rise of anti-foreign nationalism which imposes inequitable restrictions on foreign investment. The Canadian economy, and before it the United States economy, greatly benefited from historically friendly environments which encouraged foreign investors to help develop the available opportunities for private business and industry.
In many areas in the world, however, the forces of anti-foreign nationalism are now threatening to distort or displace the competitive market mechanism. In spite of its imperfections, the market system has proven itself to be the most efficient regulator and allocator of the trade and investment process. Whether directed against foreign trade or foreign investment, these forces tend to represent a disguised form of protectionism. In my view, the economic environment should continue to encourage the use of savings for such investments. They are necessary to ensure that the most efficient and productive economic system yet devised be permitted to continue contributing to the future welfare of all our citizens.
It seems to me of overriding importance, however, whether we are weighing monetary reform through an International Commission or imposing unilateral adjustments in trade and investment patterns, that our judgments should be tempered by a fundamental concern for those two-thirds of the world's people continuing to live in poverty. In the evolving world economy, plans for the growth of the richer nations must also take into account the needs and aspirations of the developing societies. Our longer-term goals must be the free flow of trade and investment, monetary stability and worldwide economic growth leading to a better life for all people. The sound improvement of monetary relationships is a significant step along this road, and one that can be achieved only through a spirit of co-operation and international solidarity.
Mr. Rockefeller was thanked on behalf of the Empire Club of Canada by Col. E. A. Royce, E.D., C.D.
EDITOR'S NOTE: This address perhaps ranks as one of the timeliest of almost 2,000 speeches that have been given to Empire Club audiences over the past 70 years. On December 18, 1971 (two days after this speech) the Finance Ministers of the major European trading nations met with their counterparts from the United States, Canada and Japan in the Smithsonian Institute in Washington and came, to what President Nixon described as the "most significant monetary agreement in the history of the world". This was the first major step towards a reorganization of the world monetary system, that had not been significantly changed since the Bretton Woods Conference of 1944.
The United States agreed to raise the official price of gold from $35 to $38 an ounce. (The first official increase in the price for gold since 1934, and an effective devaluation of the United States dollar by 7.87%). Japan, Germany and other countries agreed to an upward revaluation of their currencies in terms of the United States dollar, while the Canadian dollar, which had been floating since May of 1970, was allowed to continue to float. The import surcharges, which had been considered to be a major irritant to Canadian- U.S.A. relations, were removed.
Although world currencies were again fixed in terms of the United States dollar (Canadian excepted), the permissible fluctuations from parity were widened to 234% much along the lines suggested in Mr. Rockefeller's speech.